Buying the dip in a trend

Two steps forward, one step back

Even the strongest trends don't go straight up. They climb, rest, dip a little, then climb again. That little dip is a pullback.

Imagine the ice cream truck is driving down your street. You could sprint after it (chasing), or you could wait at the corner where it always stops. Pullback traders wait at the corner.

Why wait?

Buying right after a huge green candle is like buying at the top of the stairs. If price dips, you're instantly losing, and your stop has to be far away. Buying the pullback gives you:

• a better price, and
• a closer stop, so you risk less for the same target.

Where pullbacks like to stop

You already know these spots from earlier levels:

• An old ceiling that became a floor. Once price breaks above resistance, that level often turns into support.
• A moving average, like the 20-day.
• A Fibonacci level, like 38.2% or 61.8% of the last move.
• A trendline under the rising lows.

An example rule set

Made up, just to see the shape:

1. Trend: price is making higher highs and higher lows, and it's above the 50-day moving average.
2. Spot: wait for price to dip back to the old ceiling (now a floor).
3. Proof: wait for a bullish candle there, like a hammer or a green engulfing candle. It shows buyers came back.
4. Entry: when price goes above the high of that candle.
5. Stop: just under the low of that candle.
6. Target: the last high, or twice the risk.

Say the hammer's high is $41 and its low is $39. You get in at $41 with a stop at $39, risking $2. The old high is $45, so the target is $4 away. Twice the reward for the risk.

When it works

In healthy trends with clear levels, where buyers keep stepping in at the same kinds of spots.

When it fails

• The dip doesn't stop. Sometimes a pullback is really the start of a turn. Price slices right through the level. This is why the stop matters.
• The dip never comes. Strong trends sometimes keep going without you. Missing a trade costs nothing. Chasing it often does.
• Warning sign: if price falls below the last higher low, the uptrend itself is in question.

As with every rule set in this level, test it on old charts before trusting it. Level 8 covers backtesting.

Remember

• A pullback is a small step back inside a trend.
• Waiting for it gives a better price and a closer stop.
• Wait for proof, like a bullish candle at the level.
• If price breaks the last higher low, the trend may be ending.