Quick Tip On Dealing With Risk Sentiment Pullbacks

Dealing with pullbacks can be tricky, but it doesn't have to be complicated.
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We have a great question here in the Q&A, saying that currently we trading in line with this risk on tone, we are seeing equity markets moving up, and just as expected, we did see equity markets bounce from some of these support areas, moving to the upside.

But having a look at our major currency base, we haven’t seen the same type of movement in the Ozzie versus the US dollar, the Euro, as well as the Kiwi on that expected move to the upside in equity.

So the question is, with equity markets now moving towards these key significant resistance areas on a couple of these key equity indices, if we do see a sustained pullback from these resistance areas, how will that most likely affect these trades of ours and should we change our bias?

So I think this is an excellent question in terms of how we can handle pullbacks in a risk on a risk of environment, and we haven’t really seen our pays do anything much.

Let’s say we do move into these overall resistance areas for the S&P 500 that comes in at that all one pivot, we can see this overall resistance coming at the ASX overall resistance at the UK 100, also seeing a resistance for the Dow Jones Euro stoxx. So across the board, we are moving into significant resistance areas and looking over to the majors, we haven’t really seen a pop much higher in some of these pays as expected.

Now when that is the case, when we do eventually reach these levels and we start to see a more sustained pullback, obviously if there’s a change in the bias, if there’s a catalyst that comes out and negates the risk on tone, then obviously that’ll be a good spot for you to liquidate those positions. Now what if we move into the zone and we don’t have a new catalyst changing the tone but we just see a sustained pullback as expected from resistance areas.

Now when that happens, we can expect some pullback in these pairs that we trading as well so we can expect a pullback in the Aussie versus the US, and a pullback in the Euro versus the US. How far it pulls back is normally the question. So, how far do you allow this thing to pull back against your trade before you decide to take it off and rather look for another opportunity.

Now, this is where the personality of the trader comes into play a lot. If you are going to be stressed out, if and when the market does pull back from resistance areas and you’re still very close to entry, then nothing stops you to liquidate this position, wait for that pullback that you’re expecting to occur, and then get back when you see you know, get back into the drag when you see equity market resume that up.

So, latter we see equity market start to pull back it reaches these levels and starts to jump to the upside again, you can by all means re-enter the trade and if you’re still within a small profit or a small loss, still very close to that support level. So if you are ever as stressed out with the expectation of a pullback, then just liquidate that position while you’re still close to that entry, and wait for the market to pull back if you’re expecting one. You can always re-enter at a better price if the market does pull back.

The obvious risk to that is you might not see that sustained pullback happen that you’re expecting, you might just see equity markets continue to move to the upside break through these levels and then of course, you’re out of your trade and possibly you won’t get that better entry that you had at these support areas. So, it’s a little bit of a trade off.

So at the one end you need to be okay with sitting through the draw down, and at the other end, you need to be okay with missing the trade in case it moves without you.

So, it really does depend on what type of trader you are, if you’re going to be prone to a lot of stress with the market pulling back on that position with the expectation of a possible pullback in equities, then nothing stops you from just liquidating that position and waiting for a better entry if and when that pullback eventually happens.

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