The 50% Retracement Entry Strategy

Filed under: Learn Forex Trading |

Today, I would like to talk about an issue and a forex trading strategy that seems to polarise traders –with some advocating it and others dismissing it as a high risk entry: that is the 50% retracement entry strategy.

 

Figure 1.

Figure 1.

If you take a look at Figure 1, I will take you through a brief example of how this strategy works. To begin with, the underlying principle of this strategy is that it allows trader to get in the market at a better price. However, conversely, those who do not advocate this strategy would say that you are going against the short-term market momentum, and as such, are exposing yourself to greater risk. Both of these views are valid – so without further ado, let’s take a look at this example.

 

Figure 1 (which was traded on Forex Tester) show a bearish pin bar setup occurring at a previous high and support area in the market. This pin had a very long upper shadow, and it closed near the centre of the candle. For me, this is key. If the close is near to the 50% area of the candle already, then there is a high chance of a 50% retracement of the candle being filled, leaving you will a really good risk-reward scenario.

 

In this example, the 50% retracement entry was filled perfectly, and a large bearish candle followed – as expected. Price then slowed down a little, continuing to make bearish price action. However, the latest bearish candle has a long lower tail, signalling that the bears may be running out of steam. Here, I would move my stop to a few pips above the high of this latest candle, and see how things play out from there. This still leaves a profit of around 1.5 times the risk if the stop is hit, which would be much less if the entry had been at the low of the pin bar.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>