A two-legged pullback to the 20-period exponential moving average is a high probability trade entry set up inside a strong uptrend for buying a dip in price action. It can also be a short selling opportunity on a rally back to the 20-EMA during a downtrend in price action.

Any candle that goes higher than the previous candle begins a new leg up in price. Any candle that goes lower than the previous candle begins a new leg down in price.

Trading rules for the two-legged pullback to the 20-EMA

Dip buy signal

  • Strong uptrend in price action on a chart.
  • Two-legged pullback down to the 20-EMA.
  • Enter at the close of the candle that bounced back from the 20-EMA.
two legged pullback
Chart courtesy of TrendSpider.com

Short sell setup signal

  • Strong down trend in price action on a chart.
  • Two-legged rally back up to the 20-EMA.
  • Enter on the candle that tested and was rejected off the 20-EMA resistance.
two legged pullback
Chart Courtesy of TrendSpider.com

Continuation pattern trades work out as the trend traps counter-trend traders that fade the primary move in price. Two-legged pullbacks are tempting entries to counter-trend traders to fade the primary move.

On a trending chart, the two-legged pullback pattern to the 20-period moving average is a high probability trading setup entry before a continuation of the trend. This is primary a signal for the daily chart but the principles can work on other time frames.

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.