Entering on Retracements or at the Break?

Filed under: Learn Forex Trading |

In today’s trade example, I took you through a trade that could have been a winner or a loser, depending on how you played the setup. I generally enter a trade (if a price action signal is present at an area of support/resistance) in two ways: either at a 50% retracement of the candle, or, at the break of the high or low of the candle (depending on whether it is a long trade or a short trade).

 

There are pros and cons to each of these approaches. By entering at a 50% retracement, you are making the stop loss much tighter, and therefore, your target will be much closer. You also have a greater scope for a higher risk-reward scenario, and can easily get a risk-reward of 1:3 or perhaps even more. The downside to entering like this is that you are going against the very short-term market momentum, and as your stop loss is closer, then you have a much greater chance of it being hit.

 

If you enter at the break of the high of low of the candle (depending on the nature of the trade), then you are going with the current momentum. However, you will often find that your stop loss is quite a distance away if you place it at the opposite end of the candle. This makes your target quite a distance away as you want a risk-reward of at least 1:2.

 

As I said, there are pros and cons to each of these entry approaches, and I tend to use both depending on the market situation. If I feel the entry would be too wide with the entry at the break approach, I go for the retracement option. However, if I feel that the retracement option would leave the stop too close, I then opt for the entry at the break approach. This is what we call discretionary trading – as the choice is ultimately up to the discretion and judgement of the trader.

 

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