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Pros and Cons of Using Retracement Trading Strategy

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.

Reasons to Use Retracement Trading

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.

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Advantages of Retracement Trading

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:

  • Entries with high probability. The strategy ensures high-probability entry opportunities, especially if one witnesses a strong price action signal that reaches the level of the following retracement along with signals of the price bouncing down from that level. Every time you observe a chart with price rotating or retracting, it means you should look for a good entry opportunity.
  • Better Risk-Reward Ratio. In theory, retracement trading makes it possible to set tighter stop-loss orders instead of using a standard width for them. However, this particular method is optional. You do not generally have to use tighter stop losses.
  • Fewer Premature Stop-Outs. Continuing the idea of a more flexible stop loss placement, we should also mention another advantage of using the retracement trading strategy. For example, a trader can place a stop loss using a further area that goes beyond the trading chart. In other words, it is possible to perform stop loss placement away from moving averages or the key levels. It is supposed to ensure more chances to work out

Disadvantages of Retracement Trading

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:

  • Possibility of Trades Missed. With retracement trading, you need to be prepared for some trades getting away. As a rule, the approach requires much of waiting for the price retracement. It means you are solely focused on an anticipated momentum while other entry opportunities can be missed. However, you should always remember that missing out on a trade is not a disaster. Worse things may happen when entering the wrong trade.
  • Fewer Trading Opportunities. Again, with retracement trading, you need to be ready that you will have fewer trading opportunities in general. Markets do not retract all the time. They require specific triggers. Some markets can perform minimal retracement for a long time. You can only sit and wait, which can be quite annoying especially for beginners and pro-active traders.
  • Advanced Discipline. As previous points show, applying the strategy calls for improved discipline and steadiness. Not all traders will stand it waiting for too long and missing out.

Managing Risks with Retracement Trading Strategy

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.