Entering on Retracements or at a Break?

Filed under: Learn Forex Trading |

There are many ways to enter the market when trading price action signals, and two of the most popular ways are by entering on a 50% retracement of a candle, or by entering at the break of the candle. Both ways have their merits and are advocated by different traders with different personalities, and I would like to take you through the ins and outs of these methods right now.

 

Entering a Trade on a 50% Retracement

To begin with, let’s take a look at entering a trade on a 50% retracement of a candle. The idea behind this is to make your stop loss tighter, and make your profits bigger. For example, let’s say that a pin bar forms in the direction of a dominant bull trend and you want to go long. You could enter right away with a market order. Or, you could put an order in at a 50% retracement of the pin bar. By doing this, you are making your stop tighter and your potential profit bigger. However, the downside is that you are going against the very short-term momentum, and as you stop is tighter, it has more chance of being hit. Another thing is that the market may not retrace at all and you might miss the trade opportunity altogether. The upside of course is that your risk-reward scenario is much improved.

 

Entering at the Break of the Candle

Your other option is to enter the market at the break of the aforementioned pin bar. This is like getting added confirmation that the market is moving up before entering. You can set a ‘buy stop’ order to do this. The downside is that your stop is wider and your risk-reward scenario is limited. However, you are going with the momentum and the use of trailing stops could limit your risk further.

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