Retracement trading is a simple concept that relies on the process of identifying the period when the price is retracing back to the latest move either going down or up. To make things even clearer, think of the retracement trading like moving the same way you entered the room. Think of it as a reversal action that repeats every previous step in the opposite direction.
Today, we will discuss some of the major aspects as key components of the retracement trading strategy with its major hits, misses, and reasons to apply in the market. We will also cover several risk-management tips. So, stay tuned.
Why is retracement trading so important? Well, it provides several crucial opportunities that beginners can miss due to a lack of expertise and practice.
The first reason to use retracement trading is to have a chance to find a better price to enter the market. Besides, the strategy allows finding the optimal position for placing stop-loss orders. It results in an improved risk-reward ratio.
Traders with this strategy can benefit from a more comprehensive approach than simple “market entry”. What’s more, it ensures a safer market entry strategy, a more flexible approach when managing market-entry risks, and ensures a higher return.
With all these reasons in mind, let’s have a closer look at all possible hits and misses a retracement trading strategy can bring.
We are going to start with major pros. The strategy itself ensures a more accurate and precise price hunting. A trader acts like an elite sniper trying to hunt the perfect moment down and enter the market at the best price. So, the main advantages are as follows:
In reality, none of the available trading strategies guarantee 100% success. Retracement trading is not an exception. It has several specific downsides that beginners need to take into account before applying it:
The main risk of missing a good trade during retracement is placing a stop loss at the wrong area. The key to successful risk management here is to have enough patience and wait for the price pullback. The tactics will make it possible to enter the market using a point with a higher probability as well as benefit from safer stop loss placement within the price chart.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.