Hello and welcome to another edition of the bulls vs the bears. Last time we looked at five support and resistance types you absolutely must know Today we are going take a look at six retracement entry types you have to know for your own good. It’s absolutely important that you know these powerful patterns. Why? Because they are like shooting stars. IF you miss them, you may never see them again.
If you truly are a forex trader you should have come across the term retracement entry, Retracement entries are absolutely so important it will be in your best interests to take advantage of these powerful chart patterns. But if you haven’t come across retracement patterns don’t worry. By the end of this post your understanding of these patterns would have been so illuminating that there is no way you are going to pass up on profiting from these entries. I guess the question most of you are dying to ask is:
What is a Retracement Pattern?
Well a retracement pattern is when price pulls back on a recent move, be it up or down. Ever found your in a situation where you’ve lost keys and had to retrace your steps to establish where you last saw them? It’s the ame concept here in that the retracement entry is the reversal of a recent price move.
Why are Retracements Important?
Well they represent the greatest opportunity ever to enter the market at a decent price. Even more importand retracement entries make room for the all important stop loss, better risk reward and much more. A retrace entry is more conservatiove compared to your typical market entry and is a much safer bet.
So your objective as a forex trader is get the best entry price and manage your risk as best as you can. At the same time time you must also aim towards humongous returns. The retracement entry will most certainly help you accomplish these tree objective. However, let me sound a note of caution. There are pros and cont so tusing these retracement entries. So we’ll look at both sides starting with the
Pros of Retracement Trading
High Probability Trades
One exciting benefit of trading retracements is the possibility of catching high probability signals. These high probability signals occurr right after the end of theretracement entries. You absolutely have to take advantage of these high probability signals because they can go for weeks sometimes months if you get the direction right.
Markets usually go back to the average price over and over again. This becomes much clearer after you have looked at the price charts for a few minutes. So when you see the retrace repeating itself over and over again, your mind should tell you”This looks like a high probability signal. Get ready to make your entry.”
Flexible Stop Loss Placement
Retracement trades allows for flexible stop loss placement. Just make sure you place the stop loss as far away as possible from any where in the chart that is likely to suffer a humongous hit. If you want your piece of mind keep your stop loss away from areas such as key levels, moving averages, or pin bar high or low. Keeping your stop placement further away from these even areas will give your trade a greater chance of sending profits in your direction.
Improved Risk Rewards
Probably the best part of retracement trading is that you get improved risk rewards. with risk rewards you can place a tighter stop loss as you get closer to a key level or a pin bar 50% level. If you place a 100 pip stop loss and a 200 pip profit target, you can turn it into a 50 pip stop and 250 pip profit. How about that?
However, if you are entertaining plans of increasing your risk reward. how about using a standard stop loss instead of a tighter stop loss. With a standard loss in this scenario, you give your trade more oxygyen to breath instead of hanging a tight stop loss noose around your neck. In this case a 100 pip stop loss and a 200 pip profit target could translate into a 200 pip stop loss and a 250 pip profit target. I can hear somebody asking “How come? Well that’s because your standard stop loss gives the retrace entry the oxygyen it needed to run in your direction due to the price pulling back compared to you making your entry at a terrible price. Had you entered with a terrible price, you would have suffered a nuclear-sized loss.Re
Now let’s get to the dreaded cons of Retraced Trading. Start with
Missing Out On Trades
One annoying fact about waiting for a retracement is that while you wait, a good trade getsaway. This can get on your last nerve, not to mention challenge your trading mindset. Then again missing out on juicy trades may not necessarily be a bad thing. At least it’s a whole lot better than over-trading. I can hear somebody with a thick frown on his face asking”Are you crazy?”
Not only is retracement trading doubly frustrating , but it takes incredible focus to stalk sit and wait for that high probability signal to show up. However, if you master sitting and waiting long enough you will be well ahead of the losing pack. So regardless of the entry method you are deploying, you must cultivate the discipline in order to prosper as a fore trader.
Placing A Stop Loss Wrongly Can Get You Knocked Out Of A Trade
The last thing you want to do is place your stop loss at the wrong place. Do that and you will get knocked out Mike Tyson style out of a trade. What makes it so painful is that you are absolutely spot on about this trade. But because you decided to put a tight noose around your stop loss you got blown off the bridge.There is a solution to this problem. Just learn to wait for retracements or pull backs because not only will you find a high probability signal when you wait, but you can put your stop loss at a safer spot on the market.
I know I know. Getting your stop loss knocked out of a trade can downright sap your enthusiasm. Not only that but the knockout can take you out of your trade before the trade even gets started. Fortunately the retracement trade shows you the way out by allowing you to put the stop loss at a safer if not wider spot and allows you to make some much needed cash in the process.
You need to understand that when a market retraces or pulls back, it’s basically telling you”Put your stop loss at a place where it’s less likely to suffer a cold blooded knockout.” Now most retracements occur at support and resistance levels. So you’d be better off placing your stop loss below that level to avoid the Mike Tyson left hook knock out I mentioned earlier.
Less Trades In Occurrence
Wanna know why you don’t see more of market retracements on the charts? That’s because the forex market does not retrace that much. Normally when a retracement occurs, a pullback follows suit. Unfortunately that is not always the case. Consequently the number of trades drop considerably. So what you get is the market creating minimal retracements. This suggests that opportunities to trade in this scenario are very slim.
Of course this will make any trader pull his hair out. But you must keep your discipline or else you end up in the losing pack of naive traders. If you are able to maintain your composure you will be laughing all the way to the bank. Please note that just because there are a few disadvantages to trading retracements does not mean you shouldn’t do retracement trading. The pros definitely outweigh the cons. So knock yourself out with the retracements.
Okay enough of the depressing cons!Let’s get down to more exciting stuff such as:
Examples of Different Types of Retracements
Let’s take a lake a look at some examples of retracement types so we get a clear idea of what they look like when we come face to face with them on the charts.
Starting with:
Retrace Entry Without Price Action Signal
On the left side of the pic are retracements without a price action signal in an uptrend. The sky blue shaded areas represent the retracements. In each of these shaded areas you have price retracing or pulling back to the key levles as shown in the chart. We dont see any obvious price signals, But we can see that price barely pushing aove these levels.
If you are smart you on a tie sensing humongous risk reward opportunities. That’s assuming you get in on a tight stop loss
Retrace to Key Level With Price Action Confluence
Herr you have considerable action happening along all the key levels. You also have three price action signals forming along these levels. Now these signals came about as a result of price retracing up or down to key levels on the chart(labelled thick green).
How do we anticipate these signals? Just wait for price to pull back and then watch the price signals take shape along the key levels. This is probably the highest probability trade out there. Looked up Something Called Price Confluence. It will most certainly add to your understanding of this tutorial.
Next up is
50% Area Retracements
Now the 50% retracement is a very popular occurence on forex charts. Here we have price retracing 50% of it advancement, as indicated by the 50% zone. Watch out for these pull backs to these 50% areas as they he perfect platform for price to break through
Consequently price moves back in the direction of the initial move. Like I said earlier, 50% doesnt happen often. But they are a very useful to have in your trading tool box.
Next up is
Retrace of Signal Bar or Signal Area
Here we’ll be looking for a 50% pin bar retrace. This is slightly different from what we covered in the last section. In this scenario, this often occurs along long-tailed pin bars where price retraces halfway towards its march form high to low of the signal bar. This gives you the opportunity to enter at a stronger price, equipped with a standard or tighter stop loss.
We’ll look at two examples of this scenario
Here we see the various risk reward levels. Notice how each risk reward level is attained by waiting for the retrace and entering at the pin bar’s 50% level(or half the size of the pin bar). This should be your approach with this type of retracement.
Let’s take a look at example 2
Here you attain the 2r profit margin by waiting for the retrace and entering at the fakey pattern’s 50% area as indicated by the red arrow.
For more information on risk rewards, look up The Phenomenon of Risk Rewards in Forex Trading
And Finally
Retracement Back To Price Event Area Or Prior Price Signal
Now this is a high probability area to look for trades- the type of trades that run for weeks. As you can see price retraces back to an existing area where a bullish pin bar forms. It then forms a bearish pin bar before the bears start a major sell-off breaking through the resistance level.
For more information price event areas, look up Price Event Zones and Support and Resistance Levels
That’s a wrap for ”Six Retracement Entry Types You Must Know For Your Own Good .” I hope you have a solid grasp of what retracement trading is all about. This post should give you a solid foundation and provide you extra tools to with which to work with in your trading routine week in week out.
Til next time take care
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