How to distinguish callbacks or reversals? A common callback trading strategy!

1. What is a callback?

A pullback is a common term in technical analysis that refers to the price making a partial adjustment in the direction opposite to the trend, provided that the market does not break the main trend. A pullback is also sometimes referred to as a “pullback” or “correction” and applies to an uptrend or downtrend.

A typical scenario in which a pullback occurs is that the transaction first reaches a phased high/low, followed by a slight pull/rebound, followed by a continuation of the previous up/down trend. In the case of daily charts, callbacks usually last for several trading days or weeks.

In real life, it is easy for investors to mix up pullbacks and reversals, resulting in significant deviations from the trend's grasp. In essence, a pullback is a temporary, limited price adjustment phenomenon, while a reversal represents a longer and more significant trend change.

A pullback can be understood as a “breather” in the market, which is the norm in which the market operates. Reasons for pullbacks include investor profit outflows, market sentiment shifts, supply relationship changes, and more.

Since a pullback implies a halt to the main trend, this gives investors the opportunity to profit from taking advantage of the market's respite.

Second, how to recognize a callback?

To determine whether the market is in a pullback phase, it should first be confirmed that the current main trend is an uptrend or a downtrend.

Investors can use trend lines or moving averages to confirm trends. As an example of an uptrend, the main characteristics of price movements are higher and lower points and higher points.

In an uptrend, a pullback usually means that the price falls from a phased high by no more than 5%-10%. This bearish period of downside is often brief, and the price quickly finds potential support below and then bounces upward.

In general, a potential support level may be an upfront price high/low, a trend line, or a moving average.

Many experienced traders are good at using the Fibonacci retracement line (colloquially known as the “gold split line”) to assess potential support and resistance levels and, based on this, judge whether a pullback is likely to evolve into a reversal.

A rule of thumb in the market is that once a price pullback exceeds 61.8% of the previous movement, it is considered a trend reversal rather than a pullback, which means that there may be a fundamental shift in the overall trend.

Third, case analysis

Figure 1 is an assessment of the potential support level for a pullback using an uptrend line. The advantage of trend lines is that they depict market trends simply and clearly, but the disadvantage is that it takes a certain amount of time to verify their reliability.

Figure 2 uses the 50-day average (MA50) to help confirm market trends. The average line for different periods is able to measure market sentiment under different time frames. In general, if the price continues to run above the 50-day average, indicating that the market is in a medium-short bull market, the 50-day average can serve as a potential support level for a pullback.

Figure 3 shows a relatively large adjustment following a strong upward trend that nearly doubled in price. During the adjustment, the price fell below the important support of the 50-day average, suggesting that the trend is facing a greater test.

In this case, investors can consider deploying gold dividers to better assess trend developments and find potential support levels.

Figure 4 shows the effect after the gold split line is deployed, and investors can focus on these key pullbacks of 38.2%, 50% and 61.8%. Near these points, it is often easier to see the price end the adjustment and bounce upwards.

Figure 5 shows a pullback trading strategy after a market breakout. As shown in the picture, the price rallied strongly, creating a huge gap, thereby breaking through the previously important horizontal resistance level. After a few weeks, the market makes a significant pullback after the breach, in which case investors can keep a close eye on the potential support provided by this horizontal line, and once the support is confirmed to be effective, it is highly likely that the market will continue to move up.

This content discusses technical analysis, and other approaches, including fundamental analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect the expected results.

All investments involve risk, including the potential loss of principal, which cannot guarantee the success of any investment strategy.