The “Holy Grail” Daily Pullback Setup

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The name of this blog post comes from the original name of the setup “Holy Grail” which was created byLinda Rashke and published in the classic “Street Smarts”. This setup is a simple daily pullback setup that got it’s name from it’s simplicity.

I have put my own spin on this setup and have shared it with various coaching students who are trading around a day job. I’d encourage you to keep it handy alongside our well touted Volatility Breakout setup because it really is simple and effective.

The Holy Grail Pullback

Linda Rashke and Larry Connors described this pullback setup as “a precise method to measure when to enter a position after a retracement”. Here is what the Holy Grail looks like:

Rules for a Long trade:

  1. Trend Filter: the 14-day ADX must initially be greater than 30 and rising.
  2. The Retracement: price must come back to test the 20-period exponential moving average.
  3. The Entry: when price touches the 20-period exponential moving average, put a buy stop above the high of the previous bar.
  4. The Stop Loss: if executed, the stop loss is placed below the new swing low that formed.
  5. Main Target: the most recent swing high.
  6. After a successful trade, the ADX must once again turn up above 30 before another retracement to the moving average can be traded.

Usually this little setup will get back to the previous swing high/low, allowing for either a small profit or a breakeven trade. But when price continues through the high/low point, a new continuation leg begins and can provide quite handsome rewards against a contained risk.

My Notes on the Holy Grail

I like this setup because it’s simple and efficient. It is the simplest form of pullback setup there is. However, there are some things that don’t “gel” with me.

  • When the trend is strong, you may not even get a pullback to the 20 EMA.

  • Requiring the ADX to be moving back up means the entry is somewhat delayed. It’s true that in Street Smarts the actual examples don’t seem to follow this rule to the letter, but it’s worth noting that the ADX will start to move back in sync with the trend only after a certain lag, and the entry will be late.

  • What I do like is the fact that these pullbacks happen (most often) after price has made a new cycle high or low. After a new high/low, it is typically worthwhile playing the first pullback.
  • Also, there is a clear boundary that defines pullback from reversal: the 20 EMA. Price needs to touch and bounce the EMA. If we close below (on a daily basis) it’s game over.

My Version of the Holy Grail

Above you can see an example of “my version” of the Holy Grail. I have encorporated some of the best practices we discovered in our Trade Management series instead of the ADX.  Here are my rules for a long setup (invert for shorts):

  1. Price must be in an evident uptrend trend as evidenced by the slope of the 20 and 60 Simple Moving Averages (simple or exponential will work the same).
  2. Price must make a fresh cycle high (in an uptrend).
  3. Price will start to retrace, and this will force the stochastic oscillator ( a momentum measure) down. I want to see the stochastic dip below 50 (the lower, the better). Essentially this is requiring short-term momentum to be turning against the trend.
  4. Evident herd-behaviour price action. This could take the shape of pin-bars, engulfing candles, morning star, evening star, etc. Basically I’m requiring the market to show me exhauston and a potential will to resume the trend.
  5. The entry and stop loss are the same as in the original version: place a buy stop above the “price action candle” with a stop loss below the newly formed swing low.
  6. Diversify aggressively: since there won’t be many setups on each single instrument during the year, you will need to watch multiple markets (indices, bonds, FX, commodities but even stocks if you are so inclined)

In the chart above we have the most recent examples on the EurUsd – which has been a challenging market to trade. Notice how even recently, in February, the market tried to sell from the 20 EMA after the fresh February Lows: there were three exhaustion days but the market just refused to sell off – so that’s a stop-out. Compare the “valid” setups (green thumbs) with the invalid setup (red thumb): price closed materially above the 20EMA on the retracement, despite making a fresh cycle low.

As with any setup, quality and selectivity are key. Here are two recent examples that were traded by a student of mine:

Don’t Look For Setups

To be honest, the same trader that took those (evident and high quality) trades above also took a EurCad short in early February. He had marginal benefit but eventually had to kill the trade.

I believe he simply started “looking for setups”. This is a very common error that I’ve certainly made and that many traders make. Once we learn a set of rules, we apply them without appreciating the often subtle differences between a high quality setup and a lower quality setup. Fortunately this EURCAD example is quite evidently a low-quality setup so we can use it as an educational example.

Based on the original rules, there was no trade in February because although the 20EMA was slowing down, the ADX was way below 30! Essentially there was no clear trend. This is also mirrored by my variation on the theme. In the chart below you will notice how the 60 SMA was quite lateral and if you really had to question the slope of the 60 SMA, it was slightly up at the beginning of February.

So once again, the trader was evidently “seeing things” when he took this trade. But we live and learn, and nobody (and I mean nobody!) is exempt from losses or errors. The key takeaway is simply to take your time and to select only the very best trades.

Over to You

This article introduces a neat little setup that will especially be useful for part-time traders that only have time to check their charts a couple of times per day. It is a daily pullback setup with few clear rules that enforce discipline and patience.

Just as Austin and Joel have recently stated, taking a step back and trading off of longer timeframes can have decisive benefits, especially because it keeps you far away (but not too far!) from the intraday market volatility that so often “lures traders into taking action”  – and chopping up their accounts.

We will most likely be making an attempt to automate this little setup, but for now enjoy this little setup. It may very well be the Holy Grail you need to gain consistency in your trading.

About the Author

Justin is a Forex trader and Coach. He is co-owner of, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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