The best pullback strategy for beginners — and one of my favorites from a technical analysis standpoint — is the 4×4 trading strategy.
The 4×4 is a simple technical analysis trading strategy that measures pullbacks.
The idea is to wait for a stock to make a one-month high, retrace for a few days, and then resume the original trend.
I’ll demonstrate this method on a trade below so you can see the entire process step-by-step, and learn why it’s the best pullback strategy for beginners.
The Best Pullback Strategy for Beginners: The 4×4 Trading Strategy
In the image below, you’ll see that the SPDR S&P Retail ETF (NYSEArca: XRT) made a 20-day high followed by four consecutive down days.
If the XRT made a 20-day high two days earlier, it would be irrelevant because it’s not followed by four down days — that’s the key here.
Some traders might get confused because they see the stock made a 20-day price high a few days earlier. So you have to look at the 20-day high in hindsight after it made four consecutive lower closes.
Otherwise, the 20-day high is irrelevant.
The second biggest misconception traders have with this method is ignoring lows that are equal to each other.
Keep in mind that the four consecutive lower closing prices can be equal to each other. Now, this doesn’t happen often, but it does happen.
You can see from the picture below that two of the four days had equal closing prices, which is acceptable.
But there’s yet another problem area for some traders…
Make sure your five-day closing price is above the fourth-day closing price.
It’s not enough for these two prices to be equal to each other. You want to see the market turn around and show some movement on the fifth day, or the day prior to entry.
There should be some interest and volatility during this day, so you want to see some momentum coming into the market at this stage. The stronger the fifth day is, the better for your entry the next day.
The fifth day is where you need to make your decision with the 4×4 trading strategy.
If the market closes strong and there’s some momentum coming back into the stock or index you’re trading, place a buy stop two ticks above the high.
That way, if you get filled two ticks below the low, you’re protected in case the stock turns against you.
Even though this is one of the best pullback strategies for beginners, traders still lose money because they avoid placing stop-loss orders.
The sixth day is the most important…
This is when your order either gets filled or cancelled.
Remember, the 4×4 trading strategy has to be either filled or cancelled. So don’t let your order linger around after the closing bell on the sixth day if you don’t get filled.
The point of this method is for the market to snap back in the direction of the trend after a four-day pause.
If your order doesn’t get triggered, you must cancel the order no matter what your gut feeling is or what you think will happen. You have to stick to this strategy and follow all rules as closely as possible.
The final part of the 4×4 trading strategy is also one you must pay attention to.
Always know exactly what your risk level will be, and always place your stop-loss order at the same time you place your trade.
To calculate the risk level, you simply take your fill price and subtract it from your stop-loss level.
I wanted to go over the basics of the 4×4 trading strategy to show you why it’s the best pullback strategy for beginners, but also to clarify some important issues so you can begin trading this method on your own.
I hope this helps!
All the best,
Senior Strategist, WealthPress