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Good Trading Guide

Moving Average Pullback Strategy

At a glance
Status Education only. Hypothetical example, not a recommendation.
Difficulty Beginner
Markets Liquid, trending markets – major forex pairs, major indices, gold
Timeframes 4-hour for trend direction, 1-hour for entries (or daily + 4-hour for a slower version)
Time needed 15–30 minutes, two or three times a day
Style Trend following with better-priced entries
Main risk Buying a “pullback” that is really the start of a reversal
Course module Module 11: Beginner Strategies
All strategies
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“The trend is your friend” is one of the oldest sayings in trading. The problem is when to join a trend. Buying after a big rally means a worse price and a wide stop. The pullback strategy waits for price to dip back towards a moving average within an established trend, then looks for signs the trend is resuming.

It’s often a natural next step after learning the moving average crossover. Instead of entering when a trend may be starting, you enter during a trend that already exists, at a better price.

The idea behind the strategy

Markets rarely move in straight lines. Even in strong uptrends, price moves up in waves: a push higher, a pause or dip (the pullback), then another push. Moving averages give you an objective way to:

  1. Define the trend – price above a rising slower MA (e.g. the 50 EMA) is in an uptrend.
  2. Spot the pullback – price dipping back to a faster MA (e.g. the 20 EMA) or the area between the two.
  3. Time the entry – a candle showing buyers stepping back in.

You end up buying low-ish within an uptrend (or selling high-ish within a downtrend), with a stop below the pullback’s low.

The catch: every trend eventually ends, and the end often starts with what looks like a normal pullback. Some trades will be “the last pullback” before a reversal. Your stop handles that – as long as you respect it.

The rules (a complete beginner version)

These are example rules for learning and backtesting.

1. Chart setup

  • Trend chart: 4-hour, with a 50 EMA.
  • Entry chart: 1-hour, with a 20 EMA and 50 EMA, plus the 14-period ATR.

2. Trend filter (4-hour chart)

An uptrend (longs only) requires all three: – price is above the 50 EMA – the 50 EMA is sloping upwards (higher than it was 10 candles ago) – the market is making higher highs and higher lows (What is a trend?)

A downtrend (shorts only) is the mirror image. If neither applies, don’t trade this strategy – the market is ranging.

3. Pullback (1-hour chart)

  • Price pulls back to touch or come within a few pips/points of the 20 EMA, or into the zone between the 20 and 50 EMAs.
  • The pullback should be orderly – smaller candles, not a sudden collapse. If price slices through the 50 EMA on the 1-hour chart with large candles, skip the trade.

4. Entry trigger (1-hour chart)

  • Long: a bullish candle that closes back above the 20 EMA, ideally a bullish engulfing candle or hammer.
  • Enter at the close of that candle, or with a buy stop just above its high (this filters out some weak signals but gives a slightly worse price).

5. Stop-loss

  • Below the lowest point of the pullback, plus a buffer of about 0.2× ATR.
  • If that makes the stop more than 2× ATR from entry, skip – the pullback was too deep.

6. Take-profit

  • Target: the most recent swing high (the high before the pullback), or 2R – whichever is further, as long as the swing high is at least 1.5R away. If the recent high is closer than 1.5R, skip.
  • Optional: trail the stop under each new 1-hour swing low once the trade reaches +1.5R.

7. Invalidation

  • If the 4-hour trend filter fails (price closes below the 4-hour 50 EMA), stop looking for longs until a new trend is established.

Worked example (hypothetical)

All prices are made up for teaching.

Setup: Demo account £10,000, risk 1% (£100). Gold (spread bet per point), 4-hour and 1-hour charts.

  1. 4-hour trend: price is above a rising 50 EMA, with higher highs and higher lows. Longs only.
  2. Recent swing high: 2,465.
  3. Pullback: over several 1-hour candles, price drifts down to 2,438, touching the 20 EMA (2,440) with small candles.
  4. Trigger: a 1-hour bullish engulfing candle closes at 2,446, back above the 20 EMA. Entry 2,446.
  5. Stop: pullback low 2,436 minus a 2-point buffer (ATR = 10, 0.2× ATR = 2) = 2,434. Risk = 12 points. That’s under 2× ATR (20), so it’s valid.
  6. Target: 2R = 24 points → 2,470. The swing high (2,465) is 19 points away – more than 1.5R (18), so the trade is valid. Use the further of the two: 2,470.
  7. Position size: £100 ÷ 12 = £8.33 per point. Round down to £8 per point. Actual risk = £96.

Outcome A: price resumes the uptrend and reaches 2,470. Profit = 24 × £8 = +£192 (+2R). Outcome B: the “pullback” keeps going and becomes a reversal. Stop hit at 2,434. Loss = −£96 (−1R). The 4-hour filter then switches off, and you stop looking for longs.

Gold can move quickly. The same stop distance in points can represent very different risk on other markets – always calculate size from the stop distance.

Risk management

Stake per point (or pip) = (account × risk %) ÷ stop distance

  • Risk 0.5–1% per trade.
  • One trade per pullback. If you’re stopped out, wait for a fresh pullback and a fresh trigger – don’t immediately re-enter.
  • Late-trend caution. After several pullbacks in the same trend, each new one carries more risk of being the last. Some traders only take the first two or three pullbacks after a new trend begins. Test this.
  • Correlation: gold, the US dollar and indices can move together on the same news. Don’t stack similar trades.
  • News: avoid entering just before high-impact releases for your market.

Using it in a prop firm challenge

What fits well: – Trading with the trend and defined stops suits daily loss and drawdown rules. – Reward-to-risk of 2R or more means you don’t need to win most trades to make progress. – Can be traded intraday (1-hour entries), so you can usually close by the end of the day if your firm restricts overnight holding.

What to watch: – Ranging periods: the trend filter keeps you out, which can mean days without trades. Don’t loosen the filter just to hit a challenge’s minimum trading days. – Gold’s volatility: if you trade gold in a challenge, a normal move can be large compared with a daily loss limit. Size carefully. – Trailing drawdown: trailing stops on winning trades interact with trailing drawdown rules. Read Trailing vs static drawdown.

Compare prop firm rules and work out what repeated attempts would cost with the True Cost Calculator before paying for a challenge.

Common mistakes

  1. Calling every dip a pullback. Without a confirmed trend on the higher timeframe, there’s nothing to pull back in.
  2. Buying without a trigger. Touching the 20 EMA isn’t a signal on its own. Wait for the candle that shows buyers returning.
  3. Buying sharp, violent drops. A fast collapse through both moving averages often signals a change in trend, not a pullback.
  4. Stops too tight. A stop right at the 20 EMA gets hit by normal noise. Place it below the pullback low with a buffer.
  5. Ignoring the nearby high. If the previous high is only a few points away, the reward isn’t worth the risk.
  6. Adding to losers. Buying more as price falls further “because it’s a better pullback” turns a planned loss into an unplanned one.
  7. Switching moving averages every week. Pick 20/50 (or another pair), test it thoroughly, and stay consistent.

How to backtest it

  1. Pick one market and go back 12–24 months on the 1-hour chart, using bar replay with the 4-hour chart open alongside.
  2. Write the trend definition down first (above 50 EMA, rising, higher highs/lows) and apply it mechanically.
  3. Record every valid pullback, including the trades you’d “rather not count”.
  4. Log: date, trend status, pullback depth (in ATR), trigger type, entry, stop, target, R result, pullback number in the trend (1st, 2nd, 3rd…), notes.
  5. Aim for 100+ trades.
  6. Analyse: win rate, average R, expectancy, longest losing streak, and whether early pullbacks performed differently from later ones in your sample (be careful with small numbers).
  7. Test one change at a time – for example, candle-close entry vs buy-stop entry.

Then forward test for at least 60 days on demo (Demo trading), journaling every trade (Trading journal).

FAQ

Which moving average is best for pullbacks? The 20 and 50 EMAs are common choices, but there’s no magic setting. Choose one and test it consistently.

How do I know if it’s a pullback or a reversal? You can’t know in advance. Rules help: an orderly pullback that holds above the slower MA, followed by a bullish trigger, is a pullback by your definition. If your stop is hit, treat it as a possible reversal and stand aside until the trend filter is met again.

Can I use this strategy on any timeframe? The same logic works on daily/4-hour (slower) or 15-minute/5-minute (faster). Lower timeframes mean more noise and higher costs relative to the move. Test any timeframe before using it.

Is this better than the crossover strategy? Neither is “better”. Crossovers try to catch the start of a trend; pullbacks join an existing trend at better prices. Many traders find pullbacks easier to manage because the stops are more defined.

Is this strategy profitable? We don’t make performance claims. Results depend on your rules, markets, costs and discipline, and most retail traders lose money. Backtest and demo-test it yourself.

Related pages

Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. No strategy works all the time, and every strategy has losing runs. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. The rules are an example for learning and testing, and the worked example is hypothetical. No performance is implied or promised. Read our full risk warning.