Breakout Trading or Pullback Trading: What’s the Right Choice?
Published by Sharekhan Education | March 22, 2022
Breakout Trading or Pullback Trading: What’s the Right Choice?
By Anand Sharma | Sharekhan Education
The market is unclear at times, sending mixed signals; behaving in unpredictable ways. Think of times when we see a steep rise or fall without a pullback. Such situations cause some to worry about missing out on a strong rally or a steep fall. At such times, traders are compelled to buy or sell their stock.
Think of a scenario where a trader buys mid-rally with the expectation of a further rise in price. But the price does not rise further; it falls! And the trader, with their limited pocket size and risk appetite, then chooses to cover their long position. Just as they do that, the market reverses! And they continue to make the same mistake. Rinse and repeat.
In the realm of trading, traders face two choices: trade a breakout or trade a pullback. Let us then try and evaluate both options and conclude which approach makes more sense.
The Breakout Approach
Buying cheap and selling expensive is the essence of trading. However, when it comes to buying stocks, novices frequently prefer to buy after prices have climbed or after they have broken out to new highs! They frequently buy at a peak and are on the receiving end when prices fail to reach newer highs they predicted. Without institutional backing, the initial force of buying pressure fades swiftly. The novices are left with a bag of shares with their price swiftly decreasing, adding further salt to injury. Without greater buying pressure and more demand, the breakout will likely fail.
The Pullback Approach
The market largely moves in a zigzag pattern; and as veteran traders will tell you – what goes up must come down. The pullback approach is predicated on the premise that the market will invariably correct somewhat before resuming its overarching trend. And these corrections or pullbacks are considered to be great entry points.
But how does one determine the extent of the pullback? And how does one identify the reversal point? Pullback trading requires a high degree of accuracy in identifying the point of reversal, and there are several strategies to determine the extent of the pullback. We at Sharekhan Education heavily emphasize the importance of effective pullback strategies. And for a 360-degree understanding of trading and investing, its concepts and its strategies, we highly recommend you go through our extensive courses and pick out the one that best caters to your needs!
By enrolling in this stock market course, you can learn the basics and the various aspects of trading.
