Low Risk Pullback Strategy
Today, we look at a strategy that we have chosen to call the Low Risk Pullback Strategy. I first published on the blog/website over ten years ago.
Most traders love breakouts because they look exciting. However, breakouts perform differently across markets.
In the stock market, I prefer pullbacks because they often offer something more valuable than a breakout: better entry, and a better chance of making money.
Low Risk Pullback Strategy Explained
A low-risk pullback strategy is built around a simple idea:
Instead of chasing a stock after it has already made a big move, you wait for it to “come to you”.
The goal is not to predict the exact bottom of the pullback. The goal is to enter when the potential reward is meaningfully larger than the amount you are willing to risk. Also, waiting for a better entry can be one of the most underrated skills in trading.
Backtest of The Low Risk Pullback Strategy
We backtested it on the S&P 500 (SPY):
Performance
No. of trades: 403
Average gain per trade: 0.6%
Win ratio: 76%
Profit factor: 2.3
Annual returns (CAGR): 7.4%
Exposure/time in the market: 25%
Risk-adjusted return: 29% (CAGR divided by time spent in the market (0.25))
Max drawdown: 14% (buy and hold 54)
Trading Rules
The strategy is based on the following trading rules: