Pullback - Stocks

What is a Pullback

A pullback in stocks is a drop in price after there is an impulsive move up.  Traders use a pullback as an opportunity to to initiate a new position.  It is said on Wall Street that a trader that buys at the top is a sucker.  A much safer method of jumping onboard a trend is to wait for a pullback to the breakout level or support line. 

How to Trade a Pullback

There are a number of methods for trading a pullback, but the one with the highest of odds of succeeding is buying the first pullback to the initial breakout level.  Traders will often see a stock clearing a major resistance level and jump at the chance to put on a long position.  Problem is majority of breakouts fail, so odds are the stock will briefly penetrate resistance only to fall back inside of the previous trading range.  The other issue with buying a breakout is even if it works, it will give you the initial burst but then have a minor retracement.  It is hard for newbie traders to sit through this pullback since no one likes to go from a winning position to a losing one.  Beyond all of this, buying a pullback is more about risk management than anything else.  If a stock clears $100 and runs to $110, it is much better to buy the stock on the pullback to $105 because if it fails, you can put your stop below $100 and only risk $5.  Conversely, if you wait for the stock to rally and buy it in the $109-$110 area, you are now risking close to 10% with a stop below $100.

Pullback Trading Example

Below is an example of buying a pullback on SQNM.  The stock broke out over $6 and ran to $11.  It then pulled back to $6 on light volume and after this retracement the stock exploded.