John Hill Trend Pullbacks

What is a rollback?

Price never follows straight lines. Typically, price movements can be described as price waves. During a strong trend, each next high should be higher than the previous one and each next low should be higher than the previous one as well.

A perfect example of an uptrend is presented in the image above. As you can see, there are three correction waves, which allow traders to enter a strong bull market.

In this article, we will discuss how to choose the best point to enter the market during a correction.

John Hill’s Trend Line Theory

Trend lines have always been the best trading instrument. Even traders who do not use indicators plot them.

Generally speaking, a weak pullback indicates strength in a trend. And vice versa, a larger retracement indicates an upcoming reversal of a trend.

John Hill, a famous trading writer, created the trend theory. It is a simple theory, a trader needs to draw only two trend signal lines to define the strength of the trend.

First, you must learn to draw signal lines.

•Place a 0 at an extreme point
•Place 1, 2, 3, 4 according to the image below
Connect 0 and 4, 0 and 2.

If during an uptrend the 0-4 line is steeper, the pullback is strong. Avoid
operate this recoil.

If during an uptrend the 0-2 line is steeper, the pullback has no force. You can open a long trade as shown in the image (when the price crosses the 0-4 line).

You can also use this example during downtrends.

Reverse due to breakage

The breakout retracement is one of the most popular retracement strategies. This strategy is
the most effective at market turning points. During a strong trend, the price
could consolidate in the channel and form support and resistance levels.

In the image, you can see that the price broke the first support level (upper blue line) and
retested from below (after the breakout, the price usually returns to the broken level).
At the time of the retest, an aggressive trader could open a short trade. In this
case, the potential reward/risk ratio is higher because the price could surpass the level and
continue the upward trend.

The conservative trader should wait until the price continues with the trend structure and
break to a new low (break of the lower blue line). That is the second point of
sales entry. A conservative entry occurs later and therefore the potential relationship
reward/risk is also lower.

Horizontal steps

During a trend movement, the price always retraces to accumulate strength for the next movements. Usually, the price returns to the previous high/low level and tests it from above/low during an uptrend/downtrend respectively. This pullback could be seen as an opportunity to find an alternative entry point for those who missed the initial entry opportunity.

Furthermore, the trader could also choose to use a step pattern to bring the Stop Loss behind the trend in a safer way. In this case, the trader waits until the price has completed a step in the direction of the trend and then pulls the Stop Loss behind the last retracement area. The Trailing Stop Loss is safely protected and is not as vulnerable.

Retracement to the trend line

This is another famous method of trading pullbacks. The downside is that trend lines usually take longer to validate. You can always connect two points, but a trend line requires at least three taps. That is why you can trade a retracement to the trend line only on the 4th or 5th touch. It is a good additional method, but as a standalone method, the trader could miss many opportunities.

Conclusion

In this article, we have discussed 4 strategies to trade pullbacks during a trend in
course.

•Signal line strategy
•Recoil due to breakage
•Horizontal steps
•Retracement to the trend line

The first three strategies can be used separately, while the trend line is an additional option that can enhance any of the strategies presented.