When trading forex, prices change on a constant basis. Because of this, it is crucial and not easy to figure out the best time to exit the market to gain profits. For example, when there is an uptrend and suddenly prices start to drop, we need to decide if this is a downtrend or a pullback.
Pullback in the forex market is the sudden and temporary change of uptrend. Whenever there is a long uptrend and then suddenly prices drop a little for small periods of time, we have pullback on our hands. This term is very similar to the term Consolidation, and there are traders who use both of these terms to describe the same market conditions.
Why is Pullback important for traders?
- Some traders use Pullback as the signal to enter the market.
- Determining the Pullback is important as to not confuse it with the coming downtrend.
- Pullback usually filters out short-term traders, who made profits from the uptrend and now are leaving the market.
- Pullback can be used by traders to go short, and earn profits from the temporary downtrend.
Thorough Pullback Explanation
When trading on the Forex market, or any other financial market in general, it is important to detect different trends at the right time. Whenever there is an uptrend going on and then suddenly prices start to drop slightly, some might think that downtrend is coming, but it can very well be a simple pullback. Pullback is the term used to describe a temporary change in the bullish market. When there is a demand for the asset, and it’s going uptrend, there is a certain time when short-term traders exit the market to realize their gains. This is usually what causes the pullback, and if the asset is still expected to do well, it returns on its uptrend route.
Example of Pullback in Forex
Now let’s look at the example of a pullback in Forex, to better understand what it means. Let’s say that some news came from the European Union regarding some financial situation. This news is positive for Euro, and suddenly we see an uptrend in the EUR/USD pair. Once things calm down a little bit, traders will start to exit the market and take the profits they made. When this happens, prices are destined to go down, but this does not mean that the Euro is in a bad spot. There is still positive news and after the first wave of short-term traders exit, prices are destined to continue growing. This temporary drop in prices is what we call pullback.
You may also like: Bear Pennant, Limit Order, Best Forex Pairs.
FAQs on Pullback in Forex
Why does Pullback happen in Forex?
There are many different reasons why pullback happens in Forex. One common reason is when short-term traders are leaving the market. There can be some news that might change the market direction for a short time as there are some uncertainties and many more reasons.
How big can a Pullback be?
Pullback in general, is small price drops that don’t last for a very long time. Usually, the pullback causes a price drop of around 5% to 10%, but it can be lower or slightly higher.