Trading the Complex Pullback
11:20, 4 October 2023
Welcome to part 6 of our 7 Power Patterns series in which we teach you how to trade some of the most powerful price patterns which occur on any timeframe in every market.
The pullback is undeniably one of the most valuable trading patterns as it offers an opportunity to join established trends at favourable levels of risk / reward. However, in real-world trading scenarios, simplicity often gives way to complexity. It's important to explore how pullbacks can deviate from the ideal, straightforward model the Complex Pullback provides traders with a framework for trading pullbacks in real world scenarios.
We’ll teach you:
- How to identify a complex pullback
- The indicator that makes complex pullbacks easier to navigate
- A technique to achieve consistency in entry, stop placement and trade management
I. Key Characteristics of the Complex Pullback:
A complex pullback pattern arises in the context of a trending market. It unfolds as follows:
Initial trend move: The market experiences a strong trend move, characterised by a sustained price movement in one direction.
Pause or consolidation: Following the initial trend move, the market takes a breather and enters a consolidation phase. During this phase, prices may move counter to the prevailing trend for a brief period.
Failed resumption: After the consolidation phase, the market attempts to resume the initial trend. However, this first attempt fails to gain momentum, resulting in a pullback.
Multiple countertrend legs: What distinguishes the complex pullback is the presence of multiple countertrend legs within the pullback structure. These countertrend legs can create a more intricate and challenging pattern to navigate.
Bullish Complex Pullback:
Bearish Complex Pullback:
II. Keltner Channels: The Indicator That Makes Complex Pullbacks Easier to Navigate
The correct use of Keltner Channels can make life much easier when it comes to trading complex pullbacks.
Keltner Channels take a multiple of the Average True Range (ATR) and wrap it around a moving average. We tend to use a 2.5 ATR wrapped around a 20-day exponential moving average (20EMA). The upper channel is 2.5 ATR’s above the 20EMA and the lower is 2.5 ATR’s below the 20EMA.
Price must be moving with strong levels of relative momentum in order to hit or surpass the upper or lower Keltner Channel. Hence Keltner Channels can help to define the initial trend move required to setup the complex pullback.
The 20EMA is also a handy reference point for gauging when a complex pullback may be ready to turn.
If we overlay some Keltner Channels on our charts (below), we can see that in the bullish scenario, prices push into the upper Keltner Channel before pulling back to the 20EMA, and we see the opposite occur in the bearish scenario.
Using Keltner Channels when trading complex pullbacks can help to remove some of the subjectivity involved which may ultimately help you to become a more consistent trader.
Keltner Channels: Bullish Complex Pullback:
Keltner Channels: Bearish Complex Pullback:
III. How to Trade the Complex Pullback:
Entry: Enter on a fakeout at the pullback extremes. In Part 1 of our Power Patterns series we introduced a pattern called the fakeout. This pattern occurs when the market breaks below support only to close back above it (or above resistance only to close back below it). Using the fakeout pattern to enter complex pullbacks is advanced and will take time and practice to perfect, but it is well worth the effort as it can offer favourable levels of risk-to-reward.
Stop: Stops can be placed below the fakeout lows (bullish scenario) or above the fakeout highs (bearish scenario). An alternative stop placement technique is to use a multiple of ATR.
Price Target: Initial targets are the swing highs created prior to the complex pullback (bullish scenario) – this is a great area to take partial profits and cover stops. Traders can then use the Keltner Channels for secondary profit targets (see examples below).
How to Trade Bullish Complex Pullback:
How to Trade Bearish Complex Pullback:
IV. Managing Risks and Pitfalls:
Risk Management: Alongside stop placement, it is essential that traders implement proper risk management techniques, such as position sizing, checking the economic calendar, and diversifying your trading portfolio.
Additional Analysis: Don't rely solely on the complex pullback pattern for your trading decisions. Supplement your analysis with fundamental factors and market sentiment to gain a comprehensive view of the market.