Advantages of retracement trading.
🟠 Higher profit potential entries. The essence of retracement is that when the retracement ends, the price will continue in the previous direction of fluctuation. Therefore, retracements provide a great entry opportunity; if price action signals appear after the retracement, it indicates a high profit potential entry.
🟠 Fewer prematurely eliminated stop loss settings. Retracements make stop loss settings more flexible, allowing you to set stop losses further away from potentially triggered areas, such as distancing them from important price levels or moving averages.
🟠 Better risk-reward ratio. Theoretically, entering on a retracement allows you to set tighter stop losses, as you are entering closer to key price levels. Tighter stop losses mean better risk-reward ratios. Of course, whether to set a tighter stop loss is up to you.
🟠 Even if you do not choose a tighter stop loss at this time and still opt for a normal stop loss range, the risk-reward of the trade still improves a bit. Originally a 100-point stop loss and a 200-point profit target now become a 100-point stop loss and a 250-point profit target because the retracement space has become part of your profit.
Different types of retracement entries.
Next, let’s look at some examples of different retracement entry types:
1. Enter on a retracement without price action signals.
In the chart, the price retraces to an important level. There is no obvious price action signal on the chart, but we see that the price quickly sells at the important level. Therefore, we can identify potential opportunities here:
2. The price retraces to important price levels and forms a convergence point.
This is probably my favorite retracement trading strategy: waiting for the price to retrace to important price levels on the daily chart and then waiting for a clear price action signal to form here. I believe this is the method with the highest profit potential.
3. Retrace to the moving average (price average).
The market tends to revert to the mean, which can be observed through moving averages. The chart below shows the 21-day moving average used to observe trends on the daily chart. If the price retraces to this area, we should closely watch for any price action signals to appear:
4. 50% area retracement
Prices tend to retrace near 50% of major fluctuations. If you look closely at any chart, you'll find this phenomenon occurs frequently. Therefore, we can pay attention to retracements near these 50% areas; after the retracement ends, the price will continue its previous fluctuations. Even if this phenomenon doesn’t occur every time, its frequency is so high that it can serve as an important tool for our retracement trading.
5. Enter during a retracement in the candlestick chart or signal area.
Another effective method to utilize retracements is different from the one mentioned above. I call it the 50% pin bar retracement. This means that when a long shadow pin bar appears, the price may retrace to the middle of this pin bar, which is a great entry opportunity.
Wait for the price to retrace to 50% of the previous pin bar before entering, with a profit potential of up to 4 times:
Wait for the price to retrace to 50% of the false pattern combination before entering, with a profit potential of up to 2 times:
6. Enter when the price retraces to the event area.
The price retraces to what I call the event area, which is a place with a very high profit potential. In the chart below, the price retraces to the event area marked on the chart, where the pin bar signal is formed, followed by a bearish pin bar indicating a significant price drop.
I hope you now have a clearer understanding of price retracement and why so many traders value retracement trades.
Of course, there is much more to retracement trading; this sharing is mainly about providing foundational knowledge so you can immediately start practicing retracement trading.
Let’s encourage each other!