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Stocks & Commodities V. 27:2 (60-62): Entering Trades At Pullbacks by Candy Schaap

Trends And Opportunity

Entering Trades At Pullbacks

When opportunities knock, tell them to come in! Here’s how Let’s look at trend dynamics to understand how to make
VICTOR MARCHAND KERLOW

pullbacks in trends offer opportunity. entries into a trend by entering at pullbacks.

by Candy Schaap FOLLOWING THE MOVE

One aspect of technical analysis is the study of price activity
nybody who has ever bought an asset, whether it’s and trend. Traders cannot control price, but how they react to

A bonds, stocks, mutual funds, or real estate, knows

that prices go up and down. Prices fluctuate be-
tween support and resistance most of the time.
This is information that technical analysts use for
trend trading and countertrend trades. A countertrend trade is
also known as a scalp trade. As price moves back to support
in an uptrend, or up to resistance in a downtrend, there is an
opportunity to make money in the trend.
Copyright (c) Technical Analysis Inc.
its movements is the difference between profit, a small loss,
and a large loss. Using a trendline can help you identify a
trend, a pullback in a trend, and when a pullback becomes a
reversal. A trendline will also give you an objective way to
manage risk.
Figure 1 shows a price chart, pivots, and a trendline. The
arrows point to pivot lows. It takes a minimum of two pivot
points to draw a trendline. The solid line is the start of the
 Stocks & Commodities V. 27:2 (60-62): Entering Trades At Pullbacks by Candy Schaap
TRADING TECHNIQUES
Price chart

trendline connecting a pivot low and a higher pivot low.

The extension of the line (dotted) shows the trendline as
visual support.
Trendline of support
We cannot know what price will do. We must know
what we will do in reaction to price. Once we have drawn
the trendline, a long trade is valid above the uptrend line

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and stopped out if price moves below the trendline. The
uptrend in Figure 1 shows the prevailing direction of
price. A trader may take profit at a reversal with the
preparation for a pullback to support, also known as a FIGURE 1: PIVOTS AND TRENDLINES. By connecting the pivot lows you can form an
up-trendline.
scalp trade.
The dynamics of a trend can also be used to manage a
mutual fund position (Figure 2). This method shows when
to stay, when to add, and when to go away. You can use
a trendline to see when price has a pullback and a continu-
ation, and when the pullback becomes a reversal. When
you learn a few rules of trend dynamics, you can manage
a trade, manage your portfolio, and even manage your
individual retirement account (IRA).

SHORT MOVES ON A BREAK FSHOX Housing Mutual Fund

The break of the trendline is an exit or a possible short

YAHOO!
trade. Look for the same price action in reverse. The
trendline is now the area of price resistance (Figure 3). FIGURE 2: TREND DYNAMICS. Trend dynamics apply to every chart and every time
Another useful charting tool is the addition of a price frame.

Pivot highs Pivot highs

Price channel
Trendline of resistance
TRADESTATION

TRADESTATION
Price chart
Price chart

FIGURE 3: A DOWNWARD TRENDLINE FIGURE 4: A PRICE CHANNEL IN A DOWNTREND

channel (Figure 4). A price channel is the price action

contained between two parallel lines, framing the fluctua-
tions of price from support to resistance and back.
You know when to get into a trade when price is
trending. Every pullback offers an opportunity for a
swing trade in the direction of the trend. In Figure 5, the
red arrows show the pullbacks and the green arrow shows
the continuation in the trend. This is the edge to letting
your profits run.
Knowing about trendlines will help you identify support
and resistance levels. You can determine trend direction
and pullbacks for a swing or scalp countertrade. Pullbacks are a great opportunity
TRADESTATION

BEWARE THE HEAD FAKE

But you need to do more than just identify trends or
support and resistance levels. Technical analysts check FIGURE 5: PULLBACKS. Prices fluctuate from pivot highs to pivot lows.
the evidence for confirmation. They study price action for
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 27:2 (60-62): Entering Trades At Pullbacks by Candy Schaap

WU08 – 1 min Wheat Sep 2008 TRADING TECHNIQUES

922
920
916
A pullback = an entry Pullbacks are a fine way to enter a
912
trade as long as there is an exit when
908
the dynamics of a trend change.
904

Pivot low above 900 fake,” where price appears to be going in one direction but
the trendline veers to a different one.
896
ADX/DMI Schaap (13.8.25.25) +DMI pivot low Let’s see how trendlines give entry in a pullback, and then
67.37
50.03 we can check the evidence as follows: We have an uptrend
line and the completed pivot low above the uptrend line
TRADESTATION

25.00
7.47 (Figure 6). We have added the ADX/DMI to add evidence to
what we see.
FIGURE 6: PULLBACK PROVIDING AN OPPORTUNITY. Here you see a pullback But how can we avoid a feint? Figure 7 shows the trendline
in a trend with agreement from an indicator. and a pullback that continues and then at the last arrow, it is
a pullback that fails. On entry, a trader manages risk with a
stop-loss under support; in this case, that is the trendline. The
Pullback or reversal?
red arrow shows how losses are minimized with the stop-loss
when price changes direction.
Here’s the deal with the feint. The last pivot low, marked
with the larger black arrow, was not a completed pivot low.
Using a stop-loss below the trendline will limit loss, but
understanding pivot price signals is a clue to better trade
positions. Better positions will more often lead to better profits.
Let’s look at Figure 8 with ADX as the confirming indica-
tor. See what the evidence tells us about the trend. In this case,
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there is entry at pullbacks above the trendline. A stop-loss

under the trendline limits your loss. But now check the
technical evidence: The third price peak is a lower pivot high
FIGURE 7: PULLBACK OR REVERSAL? Here you see that price breaks a trendline.
and all three peaks coincide with a lower ADX. The three
pivot reversal forms a head & shoulder pattern. So there were
two clues to suggest you take profits or stay out of the trade.
The use of a trendline is a simple way to see trend direction
MVL Daily chart 38.00
and price pullbacks for entry opportunities. The ADX/DMI is
36.00 one indicator that can add to the information on a chart.
34.00 Proper understanding of price sets up the trade; proper
32.00 understanding of the indicator sets the strategy. It is not
30.32 necessary to predict direction merely to manage the trade.
Entry at pullback
Pullbacks are a fine way to enter a trade as long as there is an
28.00
exit when the dynamics of trend change.

ADX 40.00 Candy Schaap and her husband, Charles B. Schaap, are a
trading team. He is the author of the book ADXcellence:
22.20
Power Trend Strategies. Candy Schaap started her career
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11.75
hedging futures for a large corporation and has 25 years of
trading experience in futures, options, stocks, and bonds. She
consults and lectures and writes financial articles. She also
FIGURE 8: ENTERING OR EXITING A TRADE. With the help of the ADX you can
enter and exit your trades. publishes the ADXcellence Trade Letter and mentors the
TraderDoc Loot Camp.

direction of price, support, and resistance. The information is SUGGESTED READING

used to manage risk and have an adequate possibility of gain. Schaap, Charles D. [2007]. “ADX Reversal Patterns,” Tech-
This is what trendlines do. Once you have an uptrend line, go nical Analysis of STOCKS & COMMODITIES, Volume 25:
long with a stop-loss below the support. Once you have a March.
downtrend line, go short with a stop-loss above the resistance. _____ [2005]. ADXcellence: Power Trend Strategies,
A pullback or retracement can be the perfect place for StockMarketStore.com.
entering into a trend and/or adding to profitable positions. A
pullback can also lead to a reversal, so beware of a “head S&C

Copyright (c) Technical Analysis Inc.

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