A pullback is a moderate drop or a slowdown in an asset or commodity's price after a continuous upward trend. Because pullbacks are considered a temporary pause before resuming its upward journey, it can offer a great opportunity to invest, especially for traders looking to make an entry into an aggressive market.
Pullbacks don't represent a change in the price direction of an asset or commodity but a profit-making opportunity following a strong run. Retracements and consolidations are similar events and can sometimes be used interchangeably with pullbacks, although they typically refer to longer-termed drops in price.
How to identify a pullback
You can identify a pullback using technical trend analysis such as the moving average (MA) indicator, which helps differentiate a pullback from a reversal. Pivot points, Fibonacci Retracements, and RSI oscillators are also trend indicators that can help identify pullbacks.
Pullbacks tend to last only a couple of sessions; anything longer is considered a consolidation. More permanent shifts in the opposite direction are known as reversals.