Swing Trading - Pullback and Volume contraction setup - PRO

A pullback entry with volume contraction is a powerful setup used by swing traders and position traders to enter strong trends at low-risk points. Here's how you can identify and trade this setup:

✅ Concept:
• A pullback is a temporary decline in price within an established uptrend.
• Volume contraction during this pullback shows reduced selling pressure, indicating that the correction is healthy and likely to resume upward.

📊 Technical Setup:
1. Trend Filter
• Uptrend confirmation using:
• Monthly RSI > 60
• Weekly RSI > 60
• 50 EMA above 200 EMA on Daily chart (optional confirmation)

2. Price Action
• Stock is making higher highs and higher lows
• After a sharp rally, price pulls back 3–5 candles on the Daily chart
• Pullback should be orderly (no panic selling or wide candles)

3. Volume Contraction
• Volume decreases gradually during the pullback
• Look for lowest volume near the end of the pullback
• Indicates sellers are drying up and big players are not exiting

4. Entry Trigger
• Entry when price breaks above previous day's high with:
• Spike in volume on breakout
• Optional: bullish candlestick (Marubozu, Bullish Engulfing, or Hammer)

5. Stop Loss
• Just below the pullback low or
• Below the 10 EMA on daily chart

6. Target
• First target = previous swing high
• Trail SL using ATR or 20 EMA if trend extends

📘 Example:
Let’s say you’re watching Tata Motors:
• Monthly RSI = 68
• Weekly RSI = 65
• Daily chart: Stock rallied from ₹800 to ₹860, then pulls back to ₹840 with 3 red candles
• Volume during pullback: 12M → 10M → 7M → 5M
• On Day 4, price forms a bullish hammer and breaks ₹845 on higher volume

📈 Entry = ₹845
🛑 Stop Loss = ₹835
🎯 Target = ₹865+ (prior high), trail after that

🔍 Bonus Filters (Optional):
• Inside bar formation
• Fibonacci retracement (38.2%–50% zone)
• Near support from moving averages (20 EMA / 50 EMA)

Check my previous post in understanding full concept in detail. Support and follow for PRO level understanding. Share with as many retail traders as possible.
God Bless you All!

Faraaz T
Sr. Equity Research Analyst
Stockholm Securities - UK