FR40EUR FRANCE index CFD candlestick trading
Pullback and Breakout
There are only two ways of trading price action – on the pullback or on the breakout.
Breakouts are easier to identify – the bar is higher (or lower) than the previous bar.
The breakout signifies that the momentum is with the overall trend.
Provided we have a system in place to avoid fake outs, this offers a good-to-excellent chance of success.
Breakouts should only be traded in an established trend.
One way to do this is to look at a higher timeframe.
If this is heading in the same direction as the timeframe traders are trading then traders have a better chance of
success than if it is trending in the opposite direction.
Sometimes after a breakout price can retrace a little – traders should be able to establish how much it is likely to do so by looking at past price action.
For this reason traders need a larger stop loss to accommodate the possible movement.
To some the larger stop loss can be seen as daunting and a disadvantage.
However, this needs to be weighed up against the advantage of trading with overall price momentum.
The other way to trade price action is to trade pullbacks.
Traders need an established trend so you can identify how deep the pullbacks are likely to be.
The most difficult part of trading pullbacks is getting the reversal point right.
Stops typically tend to be closer on pullback strategies to protect capital.
There is not much flexibility here.
Of course, the upside is that, if traders can get it right, traders gain a few extra points / pips on each entry over the life of a trend.
These can add up to a substantial sum.
Trading pullbacks is generally more time consuming – traders have to anticipate the reversal point far more accurately.
Until the next bar is formed traders do not know if they were right or wrong.