What are Retracements In Trading

It’s an interesting but true fact that the majority of large price moves in the forex market retrace 50%. What this means is that if there is a move of 200 pips upwards, then it is a better than even chance that that move will be followed by a fall of 100 pips on average. After this retracement, it is common for the price to reverse again and continue in the original upward direction. Exactly the same applies for downward moves – after the move hits bottom, it is likely to retrace upwards by 50%. This phenomenon even happens with a fair number of smaller price moves. It’s not really important to understand why this is – there are a number of underlying factors – it’s enough to know that this is a good opportunity to enter profitable positions.

In order to identify that a potential retracement is about to happen, look for a price move followed by the start of a price move in the opposite direction – for example, if the price drops significantly and then there is a strong bullish pin bar, this may indicate that a retracement is imminent. Once it becomes apparent that a retracement is underway, you can use the Fibonacci tools on your trading station to identify the 50% retracement level. Simply choose the highest point of the pin bar where the trend started and the lowest point of the pin bar where the trend ended, and the Fibonacci tools will identify the 50% retracement level for you.

You might think you should open a position and follow the retracement. However, this is a potentially risky move. Instead, wait until there is a clear opposing price signal as the price approaches the 50% retracement point. This is a strong indicator that the original trend may be about to resume. For instance, if the original trend was a rise of 200 pips and the price then retraces downward, a strong bullish pin bar that penetrates the 50% retracement level is a strong buying signal.

To increase the chances that your trade will be successful, look for other confirming factors. For example, if the 50% retracement level in the example above also happens to be a historical support level, then there is a much better chance that the downward retracement will end and the original upwards trend will resume. The more confirming factors you see, the higher the probability of the trade – this is referred to as a confluence. If the signal is very strong and clear, you will probably want to enter the market right away. However, if the setup is a little more obscure, then you may want to wait for a pullback so that you can set your stop levels more closely and reduce your risk.