Buying Pullbacks

As part of your futures trading strategies, or as an online day trading method, buying on pullbacks is a skill that every trader needs to learn. Like any other skill, the more you do it, the better you get at it. Here are guidelines to follow when searching for buying on pullbacks (or selling on rallies):

1. The stock or futures instrument must be in a trending market. ie Market is bullish or bearish. There are no pullbacks in sideways markets.

2. Identify sectors that are outperforming the market (in an uptrend).

3. Make a list of market leaders and leaders in the sectors that are leading the market trend. 4. This point is key: Such stocks should pullback to support levels on LOWER VOLUME. Sometimes the pullback is pretty intense, especially in higher priced stocks. But, as long as the volume is average or, better yet, below average, this is still a pullback and not a reversal.

4. Preferably, leading stocks should pullback to support or key levels. This can mean different things to different traders depending on their time frame and risk tolerance. To figure out what those levels might be consider a few ideas:
-Past resistance as support.-Price action at certain levels. This can happen anywhere, but it means some kind of unusual activity where prices cluster for a few bars suggesting that a fight occurred between buyers and sellers where the buyers won-The stock pulls back to a moving average. Use the 8 day, 20 day, 50 day and 200 day simple moving averages, depending on my time frame.

5. Another key point: After entering into the trade, see the stock go up on VOLUME. LOW VOLUME ON THE PULLBACK, HIGH VOLUME as the stock advances higher. This is a sign of strength.

6. Lastly, and this goes with out saying, WHEN WRONG, GET OUT OF YOUR POSITION!! NO IF, AND’S, BUTS or MAYBE’S about it. Do not be in the business of averaging down. There is a difference between averaging down and buying into a pullback. One makes you money and the other ends careers.

These are guidelines to follow, but keep in mind not much in the world of trading is black and white. Be aware that pullbacks can be messy and uncomfortable, especially for newer traders. But, your ability to recognize good entry points for strong stocks pulling back in an upward trending market will make you more money and help you become a consistent trader.