RiskPicksWhat is a Pullback?
A pullback is a temporary move against the prevailing trend. In an uptrend, a pullback is a short-term dip before the stock resumes its climb. In a downtrend, a pullback (sometimes called a bounce or relief rally) is a brief move up before the stock continues lower.
Pullback vs reversal
This is one of the hardest distinctions in trading:
- Pullback: temporary. The trend continues after the dip. Buying the pullback is profitable
- Reversal: permanent. The trend has changed direction. Buying what looks like a pullback turns into catching a falling knife. See Reversal
Signs of a healthy pullback (not a reversal)
- Low volume on the dip: the pullback happens on declining volume, meaning sellers are not aggressive
- Holds key support: price dips to a moving average (20 EMA, 50 SMA) or prior breakout level and bounces
- Shallow depth: the dip retraces 30-50% of the prior move, not 80-100%
- Quick recovery: the stock does not spend many days at the lows. It dips and bounces within a session or two
How to trade pullbacks
- Wait for the bounce: do not buy during the dip. Wait for price to show it is recovering (a green candle off support, reclaiming VWAP, etc.)
- Use the low as your stop: if the pullback low breaks, the pullback may be turning into a reversal
- Trade with the trend: only buy pullbacks in stocks that are clearly trending up. Buying dips in stocks that are trending down is not pullback trading, it is bottom fishing
"Buy the dip" only works when the trend is your friend. In an uptrend, pullbacks are buying opportunities. In a downtrend, they are traps.