The best way for a trader to capitalize consistently on crypto markets is to be involved in a trend-trading strategy. Eventually, this trader will find retracements, but not all these retracements will be effective reversions of the prevailing directional movement. Instead, Strategic Pullback Trading represents this little retracement.
Pullback Review
Pullbacks imply an opportunity to be involved in the trend:
- During uptrends, it will offer cheaper prices.
- In downtrends, traders can sell positions at higher prices.
However, to identify a reliable trending market, traders must recognize some elements that aim to spot and measure the momentum and strength of the price.
Check also: Pullback Trading Strategy: Identifying Pullbacks!
Elements of a Trending Market
A trending market is considered the most complex phase of all price movements, as this type of market aggregates other cycles within its movement.
Under this assumption, we can understand that a trend cycle comprises the following elements:
- Momentum: When the price experiences a sharp movement from a specific area, indicating a buying or selling pressure. This movement can bounce from demand and supply zones or arise after a breakout.
- Range: A consolidation phase where the price slows down, and the trend loses strength. It often represents distribution or accumulation between buyers and sellers for a reversal or continuation movement.
- Breakouts: It happens when the price goes through a meaningful resistance or support or, at least, an area where the price could not break through for a prolonged period in the past. Breakouts take action in different parts of a trend, for example, at the upper or lower ends of a range and the last swings the trend made.
As a prior step to capitalize on Strategic Pullback Trading, it is essential to correctly identify a trend cycle based on those elements mentioned above.
As those elements appear, a trend will form higher highs (uptrend) and lower lows (downtrend), which traders can use to draw trend lines.
Trend lines will indicate turning points during a pullback to continue the prevailing direction.
How to Capitalize on Pullbacks
Once traders have a notion of the elements that are present in a trend, they can look for opportunities during pullbacks. The following method is the standard approach to identifying and trying to capitalize on pullbacks:
- Detect the market direction by drawing a trend line.
- Wait for a price retracement to the trend line.
- Spot a price action pattern to execute an entry.
As long as the price does not break the trend line considerably, there is Strategic Pullback Trading. This type of retracement lacks the strength to be a reversal, so to measure the strength, traders can employ techniques such as the following:
- Using a volume indicator.
- Detect overbought/oversold zones in the trend.
To consider an entry, traders can place orders at the breakout of chart patterns like:
- Flags.
- Pennants.
- Triangles.
To consider an exit, traders can use the following:
- Double tops/Double Bottoms as a signal of reversion.
- Upcoming support and resistance zones.
Check out more about Pullback Trading Strategy entry and exit points!
Conclusion
Striving to capitalize on pullbacks allows traders to get into prolonged movements that they expect to be the more profitable and safer method to profit from markets.
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