The “Impulse Pull Back Strategy” is a strategy that focuses on buying currency pairs that have pulled back after attempting a new uptrend breakout and selling currency pairs that have just pulled back after attempting a new downtrend. In other words, before going long/short we should look for a trend reversal signal.
In order to start trading with strategies, you must first have a basic understanding of technical analysis. If you do not know any technical analysis, this article is about to turn into gibberish for you. Please check out some of our technical analysis resources here, or view our available trading courses here to learn more about technical analysis. Now, on with the strategy.
This is a day trading strategy which uses the 1-minute, 3-minute, and 15-minute time frames. In this strategy, I am looking for EMA crossovers on the chart. Here is what a trend reversal with an impulse pullback strategy applied would look like.
The custom moving average we use is the 9 EMA and 26 EMA. When going long we will look for the 9 EMA to cross over the 26 EMA from under. Note that in this example the 9 EMA is the red line and the 26 EMA is the line in green.
You can see in the example photo above that there is a downtrend formed by the lower lows displayed by the candlesticks and the way they are bouncing off of the moving averages. The RSI reaches the oversold line twice. There is a bullish pin bar candlestick right beneath the active downtrend line. The very next candlestick was also bullish and closed above the downtrend line. At this point, the asset is moving from “cheap” to “expensive” on the RSI. The moving averages cross, indicating a trend reversal. Being able to read all this information displayed would indicate a good buy time.
You can actually see my entry on the chart in the photo above indicated by the green capital “B” and the green triangle above in the candlestick. You can not see an exit in this photo because I ended up holding this trade longer than anticipated as the trend did in fact reverse and became more profitable than originally intended.
This is how you can use candlesticks, moving averages, and the RSI to better analyze the information displayed in your charts to find better entries and exits to maximize profits. The EMA crossover alone can be found in many different setups, but even if you find them in other situations it doesn’t mean you should take the trade. There are rules to follow before placing the buy order.
Uptrend Impulse Pull Back Rules
Here are the rules for the impulse pullback strategy on an uptrend:
- Confirm Swing High.
- The 15-minute chart must show a 9 EMA and 26 EMA crossover.
- There must be no more than 3 pullback candlesticks.
- Confirm Bullish pin bar/ice cream bar Trigger Candle.
- Price must not pull back below the 50 EMA.
- Place a buy order at the high of a bullish pin bar/ice cream bar candle.
- Place a stop loss at the bottom of a bullish pin bar/ice cream bar candle.
- Place the take profit as far from your sell order as your stop loss.
Let’s go over the uptrending impulse pullback rules with a little more depth.
Rule #1 — Confirm Swing High
The EMA crossover on its own is very common to see, but what makes this strategy great is the accuracy of the price action analysis prior to and after the crossover. We look for a candlestick prior to an EMA crossover when the 9 EMA is heading towards the 26 EMA. This will be called the Swing High (SH) candle. In order for it to be a valid Swing High, the candle that follows must make a lower high for it to be a valid setup. In the example above, the Swing High, makes a higher high than both the green candle on the left and red candle on the right, which signifies a confirmed swing high.
The most important thing to understand about this strategy is the swing high must strictly appear only before, at the cross, or right after the cross but no later than that. If it appears any time later it is no longer a valid trade.
For example, if there is a higher candle than the one at the cross between the 9 EMA and 26 EMA, it becomes the new SH because it makes a higher high than the previous candle. It can come right after the cross, right at the cross, but no later than that.
Rule #2 — The 15-minute chart must show a 9 EMA and 26 EMA crossover
To see whether or not the 15-minute time frame is showing an EMA cross over, plot the 9 EMA and the 26 EMA on your chart. If the 9 EMA is crossing over the 26 EMA, then the 15-minute could be amidst a trend reversal and you could potentially find a trading setup.
Rule #3 — No more than 3 Pull back candlesticks
After we identify our Swing High there should be no more than 3 pull back candlesticks. Any more than that and the setup is disqualified.
Rule #4 — Bullish pin bar/ice cream bar trigger candle
After confirming our Swing High, we look for a trigger candle as final confirmation that the chart we are looking at is a valid setup. The candlestick right after the SH is known as a pull back. For this strategy we are looking specifically for a bullish pin bar or ice-cream bar to trigger our buy order into the trade.
In the example above we see a bullish pin bar after two pullback candlesticks, so we could set the buy order above that candlestick high.
In this case, the trigger candle was right after the pullback candles. It is common in most cases to see several corrective pullback candles after a Swing High. To find quality setups, we wait to observe these before we can enter the trade. Remember, at this point in time we are looking specifically for either a bullish pin bar or ice cream bar.
Rule #5: Price must not Pullback below 50 EMA
Our final rule before placing a buy order is that the price should not pullback below the 50 EMA. In the example photo, the 50 EMA was not mapped; however, you should know that the 50 EMA serves as a dynamic support line. By breaking the 50 EMA, the setup will no longer be valid.
Rule #6 — Place a buy order at the high of a bullish pin bar/ice cream bar candle
We will use a conditional market buy order to enter this trade. This means that we will only enter the trade once the target price is reached. We will place our conditional market buy order right above the high of the trigger candle.
The candlestick after the SH is a pullback and in this case it has a bullish pin bar, making it our trigger candle. We place our conditional market buy order above the high of the trigger candle, and as explained in the previous paragraph, the order will only be executed when the market price reaches the desired price level. If the price starts moving the complete opposite direction and it becomes an invalid setup, you can cancel the conditional market buy order.
Rule #7 — Place a stop loss at the bottom of a bullish pin bar/ice cream bar candle
Place a stop loss right below the trigger candle. Note that your stop loss distance will vary from setup to setup and you are encouraged to look for support and resistance zones. I know that a lot of you will ask how much distance away the stop loss should be placed to attain a certain percentage; however it depends on your analysis. The stop loss distance will never be a fixed number. For this day trading strategy I recommend having it be between 1-4% away from your conditional market buy order.
Rule #8 — Place the take profit as far from your sell order as your stop loss
Generally speaking, we want to be able to gain as much as we are willing to lose. You should place your take profit order at least as far from your buy order as your stop loss. In some cases you can double or triple the distance of the take profit order, or alter the take profit order by adjusting it higher as price action moves higher. You can even set multiple take profit orders using this strategy by plotting recent support/resistance zones.
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Written by Edward Gonzales © Crypto University 2021