Let me explain…
Reversal Candlestick Patterns
For example, take this chart as a reference:
The first way you can look to trade it is to use candlestick patterns.
If the price has pulled back to an area of value, an area where you think the market will reverse from.
You can start to look for reversal candlestick pattern before you enter a trade.
For example, you have a bearish engulfing pattern and price traded lower.
It's not really a very bearish candle, but nonetheless, it engulfs the body of the previous candle.
Then, you have another bearish engulfing.
A bearish pin bar, and another bearish engulfing candle.
Mind you, this is obviously a cherry-picked chart.
I cherry picked this chart, not to show you that this method is the best, but rather is to illustrate my point.
Because if you have a well-picked chart, it is much easier to illustrate the point I'm trying to put across.
But I hope you understand that there's no such thing as a 100%-win rate in trading.
There will be winners and losers no matter what your trading strategy is.
So, don't be mislead about the current chart that I'm showed with you recently.
The reason why it seems to work really well is that we are in a clear downtrend.
When you have a very clear downtrend, you realize that no matter what entries you use, chances are is that it's going to make you money as well.
With that said, the following in the example is the candlestick entry that you can consider.
Break of Trend line
As you can see here, you look for a break of trend line:
When price breaks the trend line, you can short.
Again, it works, right?
I hope you get my point that I'm just trying to illustrate to you the different ways that you could consider entering on a pullback.
But don't be misled by thinking that this is such a very high win rate strategy.
It's definitely not the truth, and it's something that you have to be prepared for.
You have to be prepared for losses no matter what approach you use.
For this, the trend line example, how you go about trading it is when price breaks and closes below the trend line, you can look to go short in this market.
But for this over here:
If you look at the strong bearish close, you probably wouldn’t go short at a very low level.
This is a trade that you possibly want to consider skipping altogether.
The last thing I want to share with you is what is called…
Break of structure on the lower time frame
Let me explain this…
For example, a price has come into this area of value in the 4-hour time frame:
What you can do is to go down to a lower time frame, like the 1-hour time frame.
And wait for a break of structure to signal to you that the trend is about to go back into its original direction.
Let me show you:
This is the same portion we saw earlier in the 4-hour chart.
How you go about doing it is you start to observe the structure of this market.
You notice that the retracement consists of higher highs and higher lows:
At this point, things start to change based on the structure of the market.
Notice that you have a lower high and a lower low:
Once you have a lower low and a lower high, it's telling you possibly that this retracement is coming near towards its end.
You can look to go short in this market when price breaks below the support over here:
This is what I mean by a break of structure on the lower time frame.
These are basically the three different ways, three different methods that you can use to enter on a pullback.
My next question is, "Rayner, what about stop losses? How do you actually manage your stop losses?"
The most logical area to set your stop loss is above the swing highs on a downtrend:
Since this is a downtrend, above the swing high would be a logical approach (red).
If you want to be more conservative, you can actually use the previous swing high as well (black).
This is something that is personal.
It really depends on your own personality and your attitude towards risk itself.
With that, I pretty much just want to give you a heads up into the things to look out for when you're trading the pullback.
And what are the options that you have as well when you are trading pullbacks.
Just to recap to what you have learned in today's video…