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How To Trade the Retracement Levels?

Discussion in 'Strategies & Systems' started by Angela_Riplay, Oct 24, 2015.

  1. Angela_Riplay

    Angela_Riplay Forum Member

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    Retracement System

    If you buy every retracement when the market is going up, you will be wrong only once at the top. A well-known saying is "buy dips in a rally".

    Similarly, if you sell every retracement when the market is trending down, you will be wrong only once at the bottom. A well-known saying is "sell rallies in a downtrend".

    It is easier for a market to continue its direction than to reverse its direction. This is known as persistence of trend. Look for retracements to start at critical points. i.e. Fibonacci levels, trendlines, support, resistance, pivot lines & previous highs and lows.

    Trade with the trend and enter after a retracement and take profits as best you can. Wait for a pivot to form and enter in the direction of the trend. Enter on a candle which makes a swing high or swing low and closes back in the direction of the trend.

    If price starts at point 1, moves up to point 2 and retraces to point 3, a trader can buy just above point 3 and the target will be point 4. Point 3 is a higher low pivot point and a higher low is a safe entry. Good rallies start from lows. Buy the first pullback from a new high. There is always a crowd that missed the first boat.

    In a downtrend, a higher low will change the short term trend.

    Similarly, if the price starts at point 1 and moves down to point 2, and retraces up to point 3, a trader can sell just below point 3. The target will be point 4. Point 3 is a lower high pivot and a safe entry. Good declines start from highs. In an uptrend a lower high will change the sort term trend to a downtrend.

    Reversals build slowly. If the market has been moving down for a long time, the first sharp rise usually finds sellers. Similarly if the market has been moving up for a long time, the first sharp dip usually finds buyers. The market does not turn on a dime.

    BUY

    In the diagram below, for the retracement system, the market turned at point 3 (the low of the red bar). The pivot or turning point was confirmed when the green bar to the right of the red bar at point 3 went above the high of the red bar at point 3 by 1 pip. You would buy there and place a stop loss just under the low of the red bar (point 3) if the number of pips between your stop loss and your entry point was not too high .i.e. you are not risking too many pips. If you cannot enter the trade within a reasonable distance from your stop loss, you would wait for a better trade.

    Our exit point will be at a trendline, pivot line, Fibonacci projection, resistance point, Candlestick reversal pattern or other reversal pattern.

    SELL

    If you look at right half of the diagram below, you will see another point 3. A lower high pivot is formed in the downtrend when the market retraced to point 3 ( the high of the green bar) when the next bar, a red one goes 1 pip below the low of the green bar the pivot or turning point is confirmed so you could sell one pip below the low of that green bar. The stop loss would be 1 or 2 pips above point 3.

    Our exit point will be at a trendline, pivot line, Fibonacci projection, support point, Candlestick reversal pattern or other reversal pattern.

    upload_2015-10-24_17-40-19.png

    When the retracement at 3 from the move 1 to 2 is approximately 61.8% expect the target move to be either 161.8% or 261.8% (Watch for other significant lines as well)

    upload_2015-10-24_17-40-44.png

    upload_2015-10-24_17-40-58.png

    When trading the 1234 pattern the 4 point or the 161.8% is typically the target. However if you draw all your lines on the chart (e.g. Trendlines, Fibonacci Lines and Pivot Lines) you may find a more profitable target.
     

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