A first attempt to sell a pullback is unsuccessful because the price pulls back past the previous peak where a stop-loss would logically be placed. A first attempt to sell a breakout beneath the previous low is unsuccessful because it is a false breakout. The price moves back into the sideways price range instead of continuing lower. A second attempt to sell the pullback is successful because the price turns lower before the previous peak where the stop loss would logically be placed.
A second attempt to sell the breakout is successful because the price continues to move lower into a downtrend. Sometimes there will be more losing trades, sometimes there will be none. The trend could also reverse so there will not be a winning breakout or pullback in line with the existing trend.
The idea is that those small losses are expected and manageable and over a series of trades, the big winners are what help profitable traders succeed. So which is best for online trading? You guessed it — both. As soon as the price breaks through the support or resistance zone, it generates a buy or sell signal and traders tend to enter the trade. This is where the novice trader gets frightened and panics as he assumes the set-up must be wrong.
However, if you are familiar with throwbacks and pullbacks, and of course if you have placed a protective stop below your entry point, you can remain calm, since even if the pattern doesnt play out, you will score only a minor loss. What causes the throwbacks and pullbacks When a price finds resistance at a certain level and later breaks through it, those people who did not anticipate a breakout and went short right before it, accumulated losses as prices surged and broke the resistance level.
However, as the price fell back to the previously defined resistance level, those people who went short would want to close their positions after their losses were minimized. And since closing a short position actually means buying the asset, they bring buying pressure back to the market, thus pushing prices up.
This additional buying pressure, coupled with short covering, further lifts the price and could set the ground for the initiation of an upward trend. The price chart areas where most people want to enter a trade are usually the most volatile areas — here prices are consolidating, traders are opening or closing positions, and stop-loss hunters lie in wait.
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