Charts and indicatorsUpdated 2 min readBy the FXNOD team
Pullback vs reversal: how to tell them apart
A pullback is a temporary move against a trend, after which the trend resumes. A reversal is the end of the trend and the start of one the other way. They look the same at the start. The difference shows in structure: a pullback holds above the last higher low in an uptrend, and a reversal breaks it.
Side by side
| Pullback | Reversal | |
|---|---|---|
| Structure | Higher lows stay intact in an uptrend | The last higher low is broken |
| Depth | Usually a fraction of the last move | Retraces all of it and more |
| Momentum | Slower than the trend move before it | As fast as, or faster than, the trend |
| Higher timeframe | Still shows the trend | Shows a level being rejected |
| After it | A new high | A lower high, then a lower low |
Signs it is only a pullback
- Small candles with overlapping bodies, drifting against the trend.
- It stops near a moving average, a trendline or a prior level.
- The move against the trend takes longer and covers less ground than the move with it.
- No major level on the higher timeframe is in the way.
Signs it may be a reversal
- A sharp move against the trend from a major higher-timeframe level.
- A break of the most recent swing low in an uptrend.
- The next rally fails below the previous high.
- Divergence had been building before the turn.
The honest position
At the moment it starts, nobody can tell. Every reversal begins as a pullback. What you can do is define the point at which the pullback idea is wrong, usually the last swing low, and put your stop there. If it is a pullback, you are in early. If it is a reversal, you lose a known, small amount.
Trading each
| Situation | Approach |
|---|---|
| Pullback in a clear trend | Enter with the trend when the pullback shows signs of ending |
| Structure has broken | Stop trading the old trend. Wait for a retest from the other side |
| Unclear | Stand aside, or trade smaller |
Retracement
Retracement is another word for pullback, often used with Fibonacci levels to describe how much of the move was given back.
Questions people ask
- How deep can a pullback go before it is a reversal?
- There is no fixed depth. The clearer test is structure: a break of the last swing point against the trend.
- Is a retracement the same as a pullback?
- Yes, in everyday use. Both mean a temporary move against the trend.
- Should I trade pullbacks or reversals?
- Pullbacks, for most traders. Trading with an existing trend succeeds more often than calling its end.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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