Shallow Pullbacks: The other 50% of Forex Action!
You know just as well as I do if you’ve done any of your own backtesting with this method of trading - there are lots, probably more “shallow pullbacks” out there in forex land than there are “deep pullbacks”. A deep pullback would be the first part of this method, basically anything that retraced back to or beyond the 61.8% lines (61.8, 75/76.8, and 87). A shallow pullback can be defined by a retracement back into the 38% to 50% channel, BUT NOT FURTHER than 50%.
Image 1: The illustrated difference between a shallow pullback and a deep pullback.
So why do we want to know this? Because we like money - and the more money the better! Basically I got tired of having to sit and watch upwards of 60% of the retracements in these markets fail to make it back to the 61.8% levels so I could trade them. So this method is meant to capture the rest of those pullbacks out there that were previously out of the confines of our method.
Image 2: This should illustrate my point. Look at all of the shallow pullbacks out there in these markets. This is a chart of the last week in the EURUSD. Now granted not all of these moves would’ve have been tradeable by the new shallow pullback method - BUT this is merely to push home my point. Shallow pullbacks are a common place in this market. Now we just have to come up with a way to capture a high probability, high odds setup to enter them. Easier said than done!
I’ve spent a couple weeks backtesting this and digging through charts to find a way to maximize profitability, reduce our risk, and keep our risk:reward in a very favorable fashion. I can successfully report back that these pullbacks work on ALL time frames, ALL markets, and will realize an INITIAL 1 Risk : 1.7+ Reward if used correctly. But that doesn’t tell the whole story. The risk : reward ratio is actually higher than that because that initial risk is only taken on by you, the trader, for the first 1/3 of the move. After which, the stop is moved up to b/e and your risk removed down to ZERO for the remaining 2/3’s of the trade. THIS IS ACTUALLY A BETTER RISK:REWARD SETUP THAN THE DEEP PULLBACKS!!!
Enough fluff. Lets get onto the entries.
Image 3: I tried to use some timeframe charts since 95% of you guys out there reading this do. So we have a EURUSD 60 minute chart. First rule, obviously you trade with the trend just as you did in the other deep pullback method. MA lines define that trend. No change there. So lets walk ourselves through this entry.
You can see on the 29th the EURUSD enters our trade channel between 38.2% and 50% but does not go further than 50%. On that same candle it closes up outside the 23.6% value of our grid. We wait for the next candle to confirm and also close above the candle. Then we enter at the 23.6% level. You can use a limit order for this entry as we want to get in AT 23.6% to keep our risk:reward appropriate. Allow up to 5-8 bars to get filled on your order. IF THE MOVE DOES NOT FILL YOU AND HITS THE SWING HIGH/LOW LEVEL (0.00%) WITHOUT YOU IN THE TRADE IT BECOMES A NULL AND VOID ENTRY ON A PULLBACK TO THE 23.6% LEVEL AND IS NOT AN ENTRY.
So you get filled at 23.6%. Your initial stop is at 45%. You move your stop to breakeven as soon as 10% is hit. You take profit at the -10% level. Simple, easy, and requires almost nothing from you to manage the trade. You can just use OCO’s and go to sleep. And trust me - that will increase your profitability. The greatest weakness of a trader is himself, not his method. Remove yourself and let your method protect you and make you money. Thats what it was built for!
Image 4: Just another example trade good for 61 pips.
So… The stats are this: After a random drag back through the charts on 6 different pairs, 4 different time frames, and 15 different trades…
80% of Trades hit their target at -10%
13% of Trades stopped out for max loss at 45%
7% of Trades stopped out at Break Even
87% of Trades allowed entry at the precise 23.6% level.
87% of Trades allowed you to move your stop up to Break Even.
I’m sure in real life the results will be less than that, but I think it should give you a pretty good indicator of possible performance. And like anything else, you need to backtest and mock trade these setups yourself. Don’t take my word for it, look at the results yourself and let me know.
I think this addition to our method can capture an insane amount of pips previously untouched by our method. And it can do so in a way that is slightly more profitable than the deep pullback method and with a bit less risk.
Hope this helps!
Cheers!