The difference between trend pullback vs trend reversal

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Trading pullback and trading reversal are used quite often. Successfully identifying and differentiating between a pullback and a reversal can help you optimize your trades.

Knowing when the price direction of an asset might change will help you decide when to get out of the market. You can also use it to set up profitable trades. However, it can be difficult for beginners to understand the difference between pullbacks and reversals. So use this TU article as a detailed guide.

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What does trend reversal mean?

A trend reversal is when the direction of an asset's price trend shifts. It implies that the price will remain in the opposite direction for some time. These directional shifts might occur after an upward or downward trend. It is hard to tell right away if a short drop in price is a pullback or if the trend is still modulating. The transformation may occur suddenly or take days, weeks, or even years. Day traders pay attention to changes that happen during the day, while investors and funds with a longer time horizon might focus on changes that happen over months or quarters.

Identifying a trend reversal

The best way to spot a trend that is reversing is to watch how the market moves and look for places where it might change. Trend lines and the moving average (MA) aid traders in spotting reversals. Price movements use historical prices to better inform trading choices in the present. Here is a tactic you can employ:

Trend lines

Using trend lines on a chart is an easy technique to spot trend reversals because they are standard trading tools and appear quickly. These trend lines will act as support and resistance levels to help you spot signs of a pending reversal. They can be horizontal or diagonal. Two trend lines should be drawn as a preliminary step. The lower trend line is created by joining two or more low price points, while the upper trend line is made by joining at least two high price points.

For a trend reversal, the lower or upper trend line must be broken when the price moves in the opposite direction. For example, an uptrend will likely change direction if a breakout happens with lower highs and lows. A downtrend turns around when a chart shows higher highs and lower lows. You can also use other Forex indicators to verify the trend reversal.

Long-term dollar index (DXY) trendline is broken

Long-term dollar index (DXY) trendline is broken

Moving averages

Moving averages (MA) show how a currency pair has moved over a certain time. They are a popular technical indicator among Forex traders. The two most common moving averages are the simple moving average (SMA) and the exponential moving average (EMA). Putting several moving averages on a chart is the best way to track price changes and spot likely changes in a trend. These can help you keep track of the trend in different ways and let you act quickly if the trend does change. You should refrain from using excessive moving averages on a chart to prevent problems. Moving averages should be used with other indicators to make it more likely that reversals will be found and identified correctly.

Long-term EUR/USD trend reversal

Long-term EUR/USD trend reversal

What is a pullback?

A pullback is a pause or mild decline from the current stock or commodity price chart peak during an upswing. The phrases "pullback" and "retracement" are sometimes used interchangeably since they are similar. Most of the time, the term "pullback" is used to describe price drops that only last a few sessions, like when the uptrend returns.

How to identify a pullback

Below are a few ways you can identify a pullback:

Moving Averages: Moving averages are one of the most common chart indicators for technical analysis. They show trends by smoothing out prices over various time frames. When faster-moving averages (with shorter periods) are higher than slower-moving averages (with longer time periods), it can mean that the price is going up.

Bollinger bands: These are a prominent stock market technical analysis tool. Bollinger bands use standard deviations to predict the anticipated range of movement. When the price drops to the bottom range, traders should consider buying.

Parabolic SAR: Pullbacks can also be found using the Parabolic SAR (stop and reverse) tool. Parabolic SAR looks at a price range to find stocks that have gone down but are now going up again. In the event of a positive move, it displays dots below the stock price. When prices are falling, dots appear above the stock.

How can I tell if the pullback is over?

A pullback is said to be over when supply is in a downward trend and demand is up. If volume increases, the market is moving back in its direction. The momentum of the price is also essential to know about the pullback. If the price starts forming bullish candles or moving averages, you may conclude that the pullback is over.

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Trend pullback vs trend reversal | What is the difference?

Reversals and pullbacks are when an asset falls from its high point, but reversals last longer. Most reversals are caused by changes to the fundamentals of an asset, which forces the market to reevaluate the security's value. For example, investors might have to change the net present value of a stock if a company says its profits aren't as good as expected. In the same way, it could be a bad settlement, the release of a new product by a competitor, or something else that will have a long-term effect on the business behind the stock. These events, which sort of happen outside the chart, will happen over several sessions and at first may look like a downturn.

FAQ

What are the ways to trade a reversal trend?

You can trade a reversal trend in three ways: support and resistance, breakout, or pull out.

What is the difference between a trend and a pattern?

A trend shows the general direction of a price over time. A pattern is a set of data points following a particular direction.

How do you know if it's a pullback or reversal?

The biggest difference between a pullback and a reversal is that a pullback is only temporary, while a reversal is a change in the direction of an overall trend that lasts longer. Pullbacks usually last for a few trading sessions, but a reversal can mean that the market's sentiment has changed completely.

Why do pullbacks happen?

When the price of a stock or commodity stops going up or goes against the trend on the stock market, this is called a pullback. It reflects a temporary drop in the price of an asset that is generally going up.

Team that worked on the article

Alamin Morshed
Contributor

Alamin Morshed is a contributor at Traders Union. He specializes in writing articles for businesses who want to improve their Google search rankings to compete with their competition.

Over the past four years, Alamin has been working independently and through online employment platforms such as Upwork and Fiverr, and also contributing to some reputable blogs. His goal is to balance informative content and provide an entertaining read to his readers.

His motto is: I can dream or I can do—I choose action.

Olga Shendetskaya
Author and editor at Traders Union

Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.

Olga has extensive experience in writing and editing articles about the specifics of working in the Forex market, cryptocurrency market, stock exchanges and also in the segment of financial investment in general. This level of expertise allows Olga to create unique and comprehensive articles, describing complex investment mechanisms in a simple and accessible way for traders of any level.

Olga’s motto: Do well and you’ll be well!