Ask experienced intraday traders where their best trades come from and many will describe the same thing without naming it: not the first burst of a move, which is fast and hard to catch, but the second leg. Price ignites, runs, pulls back in an orderly way, and then runs again, often as far as the first time. The second leg is where a trader who missed the initial break, or who was stopped out in the noise, gets a cleaner entry with better information. It is also, on strong days, where the move stretches into the kind of distance that makes a week.
Why second legs happen
The first leg of a move is driven by the participants who acted first: the large order, the trapped traders covering, the breakout buyers. Their buying creates the leg, and when it pauses, early holders take some profit. That profit-taking produces the pullback. If the underlying demand is genuine, new participants who saw the first leg and want in use the pullback to buy. They create the second leg. In other words, the first leg is the information and the second leg is the market's response to it.
This is why the depth of the pullback matters so much. A shallow pullback, holding above the midpoint of the first leg, says that sellers were weak and buyers were waiting. A deep pullback that retraces most of the first leg says that the first leg's buyers did not have company, and a second leg is much less likely.
Trading the pattern
- Identify the first leg: a clear impulse from ignition to a high, with expansion bars.
- Wait for the pullback. The best ones retrace between a third and a half of the leg, in overlapping, smaller bars.
- Enter when price breaks back above the pullback's structure, for example the high of the last bar of the pullback, or a reclaimed short moving average.
- Stop below the pullback low. That level is now the line between a continuing move and a failed one.
- Target: a common measuring technique projects the first leg's length from the pullback low. It is a guide to where the move might run on a strong day, not a promise.
The measured move is a useful planning tool because it gives you a sense of the reward available relative to a stop that sits just below the pullback. If the first leg was 40 pips, the pullback retraced 15, and the stop sits 20 pips below the entry, a measured second leg offers roughly 40 pips against 20 of risk. That is the asymmetry that makes the pattern worth waiting for.
When there is no second leg
Not every move gives one. Some news-driven moves are a single burst that never pauses. Some first legs are followed by a pullback that keeps going and becomes a reversal. The protection is the stop below the pullback low and the discipline not to move it. If the second leg does not materialize, the loss is small and defined. If it does, the trade has the best part of the day's move ahead of it. Over a sample of trades, that is a favorable trade-off, and it is the reason the pattern is among the most widely used in intraday trading.