Throwback Definition
What is a rollback?
A rollback, in technical analysis, is when the price retraces towards the breakout point after crossing a resistance level. A resistance level is where the price has stagnated or struggled to move in the past. When the price crosses this level, it is called a breakout. Not all eruptions are followed by a flashback, but some are. A pullback is a return to the previous resistance level. A false escape this is when the retrace continues below the breakout/resistance level.
Key points to remember
- A pullback is the retracement that occurs after a breakout of resistance.
- Backtracking can be followed by a continuous upward motion. Or, if the price continues to fall below the breakout point, the breakout may have failed.
- A rollback can provide a second entry opportunity if the initial breakout trade was missed. Some traders prefer to buy on the return.
What does a look back tell you?
Following a break above resistance, a pullback is the downward movement or retracement that occurs following the upward push in price. The term pullback is usually reserved for the first move back towards the broken resistance level after the breakout.
A pullback is often generated by short-term profit taking after the breakout. Day traders and other short-term traders may observe a resistance level; when the level appears to be collapsing, they also buy, which helps push the price up. Once the price has risen, short-term traders start selling to lock in their profit. This pushes the price back towards the breakout level.
Selling may cause the price to return to the breakout point, or even slightly below. If the price continues to rise after the retracement, the move can be considered a reversal. If the price returns to the breakout point and then continues to fall, this is called a false breakout. Traders will watch volume to help determine if a pullback is likely to be followed by a bullish retracement (the direction of the breakout) or a false breakout.
A breakout on high volume is more likely to succeed, which means the price is more likely to continue higher after a pullback. Lower volume on the pullback also helps indicate that selling is weak and the price is likely to continue higher after the pullback. Although nothing in the trade is certain. If volume is low during a breakout, the breakout is more likely to fail. The pullback after the breakout is likely to continue, with price falling back below the breakout point, leading to a false breakout.
Novice traders often panic and sell when a pullback occurs, even if the breakout occurred as volume increased, signaling that the pullback was likely a temporary retracement before a continued move to the rise. That said, traders should have a point of sale or stop loss where they will exit if the breakout indeed turns out to be false.
Example of a rollback in a stock
The graph of Alibaba Group Holdings Ltd. (BABA) is showing a resistance level near $82.
The price broke above the previous high on the first attempt, but failed to advance further higher. The same thing happened on the second attempt. After the second attempt, however, the price was able to continue moving higher above the resistance zone.
After the initial upward move, the price retreated towards $82 before continuing higher.
While volume can often be helpful, in this example the actual breakout was surrounded by a high volume (attempt) failed breakout and a high volume breakout Press release shortly after the escape. Looking closer, the breakout of the second attempt and the rally that managed to rise soon after were also on slightly high volume.
The Difference Between a Rollback and Fibonacci Retracements
A pullback is a general type of price retracement after a breakout. Fibonacci retracement levels are areas where the price could retrace following a price movement. A Fibonacci retracement is a percentage of the previous move, with Fibonacci math based on the percentage.
It is also important to note that a pullback is different from a pullback, which is when price breaks below support and then moves back towards support.
Limitations of Using Rollback
A rollback is a type of price action which can follow a breakout. Trying to trade it is where some traders can get into trouble.
The appearance of a pullback following a high volume breakout does not always mean that the price will rise once the pullback is complete. A false breakout could follow a pullback, which means buying on the breakout or pullback could result in a loss.
A rollback can provide an opportunity to enter a trade if the initial breakout trade was missed. Some traders prefer this entry. However, there is a risk of also missing this second entry opportunity if the price does not come back or if it does not come back far enough towards the resistance level to signal the trader to make a trade.