Pullback

Pull back is a term that refers to a market making a lower close.  A market is said to have “pulled back” if it closes lower than it did the previous session. Extended or especially sharp pullbacks can result in a market that is oversold.

A pullback occurs when a security whose price has been moving higher sells off, i.e. the price of the security drops. Most people trade pullbacks based on daily bars, although some traders seek out intraday pullbacks while others use longer time frames. The common theme is that traders are attempting to identify stocks that they feel have pulled back too far and will likely regain their upward trend.

There are numerous ways to identify pullbacks, ranging from simply “eye‐balling” a chart all the way up to using indicators such as Fibonacci numbers. Although these techniques work for some traders, we prefer a more precise, quantified approach. With exact entry and exit rules in place, we want to see robust test results for the majority of the many combinations of parameters that we’re testing, and for those results to be consistent across the entire testing period (2001 through mid‐2012). Such solid results indicate that we are not simply “curve fitting” or “cherry picking”.

When trading short‐term pullbacks, the best results occur when you hold the position for at least a few days. Often stocks pull back sharply and snap back strongly. There is no way of knowing ahead of time how far that upward move will be, so it is crucial to have well‐defined exit rules in place which allow for the rally to play out.

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