Retrace Trading

You will hear a lot about forex drawdowns, but you should weigh the drawdowns. While the word "retracement" often appears in information about Fibonacci retracements, it is a broader, more general topic, and people who mention retracements often don't refer to Fibonacci levels at all. What is a Forex retracement? Quite simply, a retracement is any temporary reversal in price within a major price trend. The word "inside" is the key here. This is the difference between a reversal and a retracement. A reversal is the end of a price trend and the beginning of a new trend or consolidation period. Retracements are only temporary interruptions. When you look at a Forex chart, you'll notice that the market always moves in a general way. In most trends over most time periods, even very strong ones, retracements are the way the market moves. You can think of it as two steps forward, one step back, two steps forward, one step back. Retracements occur during both bullish and bearish trends.

When to Enter a Retrace Trade?

1. Entering on a pullback when there is no price trend signal, that is, entering directly when the price retraces to an important level.

2. Prices retrace to important levels and converge, which is when price action signals align with other technical indicators.

3. A retracement to the moving average (average price) means entering the market when the price returns to a certain moving average.

4. The 50% area retracement means entering the market when the price retraces to nearly 50% of the main fluctuation.

5. Entering on a retracement of a candlestick or signal area that is a signal, i.e. when the price retraces to the middle of a previously formed candlestick signal or false breakout pattern.

6. Entering when the price retraces to the event area, that is, entering when the price retraces to the area where a previous major event or breakout occurred.

Advantages of Retrace Trading

Higher Entry Point

Price charts may continue in the direction of the initial move after a pullback or retracement because that's how they work. Therefore, if you see a substantial price action signal within the retracement area, then this is a very high probability entry as all signs point to the price trend rebounding from this level. The most likely way to trade is to wait for a pullback to a signaled level, although this does not always happen.

Convenient Stop Loss

With retracements, stop loss settings are more flexible. Essentially, you can move your stop loss near any area ofthe chart that is most likely to be hit. Placing your stop loss away from key levels, moving averages, or, for example, the highs or lows of a pin bar will increase the likelihood of a successful trade.

Greater Risk and Reward

Retracement entries, on the other hand, theoretically allow you to place a narrow stop loss on a trade as you enter near a key level, or in the case of a trade entry trick entry, at the pin bar 50% level. So if you decide to do this, you can set your stop loss closer than you would on a trade that didn't happen after a pullback or a trade that was placed at the high or low of the pin bar.

Disadvantages of Retrace Trading

Easy to Miss Deals

Sometimes, good trades "disappear" while waiting for a retracement that doesn't materialize. Even the best traders find this annoying and it can test your senses and trading mentality. But trust me, missing a few trades is preferable to overtrading; it's not the worst thing in the world.

Fewer Trading Opportunities

Financial markets often fail to pull back sufficiently to initiate the more cautious entries that result from pullbacks. Instead, they may continue to do some backtracking. Therefore, you have less opportunity to trade overall than someone who is not primarily concerned with price retracement.