Throwbacks and Pullbacks in Forex Breakout Trading

PullbackThrowback

In financial market, trading breakouts can often be a tricky ordeal. False or premature breaks are a common occurrence that can frustrate even the most dedicated foreign exchange traders.

One higher probability approach to entering into a forex breakout is to wait for a pullback or throwback to occur. Often, momentum on a breakout will wane shortly after the break and retrace to re-test the point of break, resulting in a pullback/throwback move. For breakout traders, the hope or expectation after such a pullback/throwback is for price to then return to moving in the direction of the original break and then to follow-through.

In technical analysis jargon, a throwback is simply a re-test of the breakout level after an upward resistance break. Similarly, a pullback is a re-test of the breakdown level after a downward support break. If the breakout is true, price should hit and bounce off the breakout price region, and then go on to surpass the point at which momentum waned and price turned (this would be the price high in a throwback or the price low in a pullback). This is illustrated on the accompanying diagram. On surpassing that point, breakout traders look for evidence of price action following-through in the direction of the original break.

For many such breakout traders using pullbacks/throwbacks, the point of entry would be at the point where price moves beyond the high in a throwback or below the low in a pullback. For more aggressive breakout traders using pullbacks/throwbacks, the point of entry might be right after price re-tests and turns at the price region of the original break.

In any case, many prudent breakout traders will often wait for a pullback/throwback before getting in on a breakout move. Traders who do so will almost certainly miss out on some potential runaway breakout trading opportunities, but that extra patience often pays off in higher-probability breakout trades that potentially have a greater likelihood of ultimately following through in the direction of the break.

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