A pullback tells you that the overall market trend has temporarily paused. This could be down to several factors, including a momentary loss of trader confidence after certain economic announcements.
As a result, pullbacks are often seen as an opportunity to buy an asset that is in an overall uptrend. However, traders should be careful to not buy into a pullback too early, especially without a risk management strategy, in case it turns out to be a reversal.
Several indicators, including moving averages and pivot points, can help you to determine whether a pullback is actually a reversal. This is because these indicators highlight levels of support. If the pullback breaks through this level of support, it is likely to be a reversal.
Traders can use CFDs to take advantage of a pullback or even a reversal. This is because CFDs enable a trader to go short and speculate on markets declining; as well as long and speculate on markets rising.
Pullback vs reversal
The most significant difference between pullbacks and reversals is that a pullback is temporary, while a reversal is a more permanent change in the direction of an overall trend. Pullbacks usually last for a few trading sessions, while a reversal can signify a complete change in market sentiment.