Hello traders and welcome to another episode of smart risk Identifying a valid pullback is one of the most challenging and key steps in market structure analysis that every trader encounters Acquiring the skill to recognize valid pullbacks allows you to identify authentic order blocks and inducement zones in the market Helping you avoid potential traps today in this advanced episode. We are diving into various pullback types Trading strategies and price actions associated with pullbacks that you might encounter in the market But that's not all. We'll break down the key criteria and rules that elevate a pullback to a high-probability trade. So traders, if that's something you're interested in, please give this video a thumbs up to show your support and subscribe to our channel if you're new.
See you after intro. Welcome back, traders. So let's get started. The first step in market structure mapping is to identify valid pullbacks. Without identifying a valid pullback, you won't be able to recognize upcoming price movements, such as continuation trends, valid breaks of structures, and reversal patterns.
So what is the definition of the pullback? A pullback, in essence, is a temporary reversal or pause in the price action against the prevailing trend. It occurs when buyers and sellers contend for dominance in the market leading to a trending or impulsive movement that creates internal liquidity characterized by inefficiency or static liquidity awaiting to be swept or filled consequently the price experiences a reversal and a brief interruption against the dominant trend filling the internal liquidity or clearing static liquidity before continuing in its overall direction price movement consists of three main sub-movements impulse corrective and continuation For example, here, if we consider this corrective move as a valid pullback, we have a confirmed break of structure.
Additionally, we can identify an order block situated at the bottom attributed to the BOS. In this scenario, we await the price to reach our identified order block and reverse its direction to the upside. To align with this expectation, we may position our buy limit order at the highest point of the order block. However, Let's imagine a scenario where our identified pullback proves to be invalid, mistakenly considered as a valid pullback due to its impulsive nature. In such a case, our identified order block loses its validity, and there is a high probability of the price triggering our stop loss.
Now let's explore how to identify a valid pullback, and the criteria and rules we need to consider. Please make sure that you watch the video attentively until the end, because in the second section of the video, We will explore various pullback types, price actions, and discuss trading strategies associated with pullbacks that you might encounter in the market. Before delving into the candlestick examples of valid pullbacks, let's have a quick breakdown of candlestick uptrends and downtrends. A candlestick-based uptrend is characterized by a pattern in which the price action produces consecutive bullish candles, with each candle exceeding the highest point of the previous one, signifying strong upward momentum.
for a single bullish impulsive movement. It is essential that the lowest point of each candle remains equal to or higher than the lowest point of the previous candles. This condition indicates that the bearish momentum in the market is restricted and the overall trend remains predominantly bullish.
The same concepts apply to the bearish scenario. A candlestick-based downtrend is characterized by a pattern in which the price action produces consecutive bearish candles. with each candle exceeding the lowest point of the previous one, signifying strong downward momentum. In a single bearish impulsive movement, it is crucial that the highest point of each candle remains equal to or lower than the highest point of the previous candles. Now let's see how we can identify valid pullback in the market.
In the bullish scenario, a valid pullback occurs when a candle breaks below the lowest point of the previous candle or effectively sweeps its liquidity. For example, in the given illustration, the last red candle has broken below the lowest point of the third green candle, indicating a valid pullback. It's crucial to note that if the price fails to break below the lowest point of the last green candle, the pullback cannot be considered valid.
It's important to emphasize that the color of the candle does not play a role in identifying pullbacks. Similarly, in a bearish scenario, a valid pullback occurs when a candle breaks above the highest point of the previous candles, sweeping liquidity in the process. To solidify our understanding of pullbacks, let's examine more examples. Consider a series of bullish candles as illustrated.
After forming three consecutive bullish candles, the price forms a temporary pause, marked by the emergence of three bearish candles, before resuming an upward push. As previously mentioned in the context of a bullish scenario, for a valid pullback, the price must break below the lowest point of the last bullish candle formed just before the temporary bearish pause. However, it does not qualify as a valid pullback, because none of the bearish candles has broken the lowest point of the preceding bullish candle. or swept its liquidity. Consequently, we consider this candle sequence as a bullish single impulse move.
In a parallel scenario occurring in the second candle series, we can see that after the formation of successive bullish candles, a temporary pause occurs with the emergence of a single bearish candle, since the price has not broken the low of any previous candle in this sequence. So, we cannot consider it a valid pullback either. On the contrary, If the bearish candle forms an equal high with the previous bullish candle, and the subsequent candle breaks and sweeps below the low of the bearish candle, it qualifies as a valid pullback.
So here we have a bullish impulsive wave, followed by a correction, and then another bullish continuation wave. These concepts are applicable to bearish markets as well. It's important to note that these principles can be applied across various time frames and any price action-based chart. Here, we are looking at the EURUSD one-hour time frame.
As you can see here, price is in a strong downtrend. Now let's identify the possible pullbacks. By analyzing the chart, we see a sequence of three bearish candles, followed by a temporary pause, marked by three successive bullish candles. Drawing lines from the highest and lowest points of the last bearish candle before the temporary pause, shows that none of the subsequent candles has surpassed the high of this bearish candle. Consequently, this does not qualify as a valid pullback.
Instead, we should consider it as an impulse move. To confirm a valid pullback, the price must break or sweep the liquidity below the latest candle created just before the temporary pause. In the following, we can see that price has broken the high of this candle and then continued to its primary direction.
So we have a valid pullback here. Similarly, we have another pullback. as price has broken the highest point of this candle, which was the latest high before the temporary pause.
Subsequently, we have another valid pullback created by this bullish engulfing candle that has broken the highest point of its previous candle. Having covered the basic concepts of pullbacks in the first part of this video, we now possess the ability to identify valid pullbacks in the market. In the second part, we will delve into advanced concepts of pullbacks, including various pullback techniques. types that traders may encounter in the market as well as trading strategies associated with pullbacks.
Pullbacks can be categorized into three distinct models, aggressive, corrective, and sweeping. Now, let's delve into the details of each type of pullback and explore how we can use them to enhance the systematic nature of our trading plan. The first pullback type is the aggressive pullback.
An aggressive pullback is characterized by a rapid and sharp retracement against the prevailing trend. It often occurs with a couple of large and strong candles that quickly retrace a portion of the recent price movement. Let's imagine we have a series of candles like this one.
As you can see, the price has broken below the lowest point of this candle, which was the latest low before the temporary pause and reversal. So we have a valid pullback here. Price.
After completing its corrective movement, reversed and pushed to the upside with great inefficiency. So here we have a valid break of structure as the price has formed a valid pullback. Now since the price has created a bullish break of structure, we can identify this demand zone attributed to it, which we believe has a high potential to reverse the price when it reaches that point. Next, we are waiting for the price to move back down again and tap into our identified demand zone. In the aggressive pullback type, the price generates a rapid and drastic movement with strong candles that quickly retrace toward our identified demand or supply zone.
In this scenario, we wouldn't consider entering the market by opening any position, even with the emergence of confirmation patterns like the change of character or flip patterns in the lower time frame. The rationale behind this is that if the price rapidly and drastically moves with strong candles into a supply or demand zone without subsiding its momentum, there is a high probability that the price will not react to that zone. Traders need to closely monitor price behavior in such cases and avoid entering the market in situations like this.
Now let's move on to the second type of pullback, the corrective pullback model. But before we continue, it's important to note a crucial step in your trading journey. backtesting your strategies. Before applying any strategy to your real account, it's recommended that you backtest it at least 100 times. To help you with this critical step, we use the TraderEdge platform for backtesting our exclusive trading strategies.
If you're interested in using TraderEdge as your backtesting tool, be sure to check out the link in the description below. The corrective pullback is a more gradual retracement that typically consists of multiple smaller candles. In this type of pullback, price generates several internal structures until it reaches the point of interest and price subsides its momentum and volatility when it approaches the point of interest as we mentioned earlier in this example we have a pullback as the lowest point of this candle has broken to the downside subsequently we have a valid break of structure and we have a valid order block which we believe has a high potential to reverse the price when it reaches that zone in the corrective pullback model as we mentioned earlier price forms several internal structures with multiple smaller candles until it reaches our identified point of interest, despite the aggressive pullback we consider entering into the market when price reaches our identified demand or supply zone.
For doing that, we can use smart money concepts various entry models, like aggressive or conservative entry model. For example, in this case, we can place a buy limit order at the highest point of our identified order block and wait for the price to activate it. or we can implement a more conservative manner by waiting for price to tap into our identified and then zoom into a lower time frame to search for any sign of change of character or reversal patterns to confirm a market structure shift. After detecting the confirmation of market structure shift on the entry time frame, we can set our entry position on the highest point of the newly recognized order block, in this case, a demand zone on the lower time frame, which is created by the change of characters wave. with a stop loss set a few pips above the lowest point of the zone, and for the take profit, we set it at the external liquidity of the higher time frame.
Now let's proceed to the next pullback type, the sweeping model. In this type of pullback, price generates liquidity pools that waiting to be swept near our point of interest by forming a static liquidity zone, like equal highs, equal lows, or trendline liquidity. Recognizing a liquidity sweep pattern, Before the price reaches our point of interest is crucial. This pattern confirms the strength of our supply or demand area. We use liquidity sweeps as a confirmation factor.
The idea is simple. Market requires liquidity for momentum. If the price doesn't sweep liquidity before a key level, it often uses that zone as liquidity to fuel its momentum. For example, here we can see that the price retraced back down, formed an equal low, and also created great liquidity below the double bottom, suggesting the presence of pending orders and stop losses waiting to be triggered and swept by the market, which is located in the near of our identified demand zone.
By focusing on zones with liquidity sweep patterns, we can increase the probability of trading setups that align with market dynamics and reduce the risk of falling into false signals or traps. The presence of the liquidity pool above our identified demand zone provides additional confirmation for a potential price reversal from our point of interest. Now that we have the desired confluence, our next step is to patiently wait for the price to sweep the liquidity below the equal lows. Now we have our desired confluence, and now we can consider to enter into the market by going long from our point of interest. For doing that, we can place our buy limit order at our demand zone.
If we want to optimize our entry point and have a better reward-to-risk ratio with tighter stop loss, We need to zoom into a lower time frame and wait for the price to tap into the demand zone and show a change of character or any market structure shift signal. And after the formation of the newly generated demand zone on the lower time frame, we can consider placing a trade. That's it traders. Thank you for watching this video, I hope you found it informative and useful. Don't forget to hit the subscribe button and turn on notifications to stay updated on our latest videos.
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