Don’t worry! We’re not going to learn how to retrace your footsteps to recover lost cash. Instead, we are going to learn how to to trade the 50% retracement strategy with price action analysis to make a lot of cash. Makes sense doesn’t it? By the way the 50% trade retracement strategy is one of the most powerful trading strategies you’ll ever trade with. You most certainly need to learn this pattern like the back of your hand if you want to rake in the moolah.
So we are going to three things: As usual,we are going to define what the 50% retracement strategy is. Next , we’ll learn how to find the 50% retracement s setup and finally, how to trade the 50% retracement strategy.
First things first:
What on Earth is a Retracement?
Well a retracement is a temporary reversal in the prevailing trend. It could be a pull back in an uptrend or a strong rally in a downtrend. As I’m sure you’re all aware by now, the market rarely moves higher or lower in a straight line. Look up any price action chart,and the evidence is abundantly clear. So once the market triggers the initial surge, a reversal takes places. By the way, a retracement is a regular event on the forex market.And this regular occurrence gives you free passage into the market and partake in the huge surge.
To help you understand how a retracement works, let me paint this nice picture. A group of investors have this gnawing feeling in their gut that the bulls are heading for the mountains. So they put in a bid to buy higher. Of course, the investors’ decision to buy higher causes the market to push higher also. Traders also notice this spike and are like”Heck,we’re going to jump on this gravy train also.”Why? Because they figure they will miss out big time,if they don’t get in on the act immediately.
These investors then close out their positions thinking “We’ve made enough money.Let’s get out while the iron is still hot.” So what do they do? They decide to sell to the very investors who jumped on their gravy train. It’s at this juncture that the market starts pulling back. Once the market pulls back about halfway, these investors then huddle up and as themselves”How about we cash in again since the other traders are exiting like flies because their stop orders have taken massive hits?” Once these investors have made up their minds, to cash in some more, they start adding to their already bulging profits. Their already bulging prosperity sends the market surging one last time, causing the process to restart.That’s how the retracement pattern works.
I guess the next question we need to ask ourselves is
How Do We Find 50% Retracement Level?
First identify whether the move starts with a high or a low. Now once you have identified the Genesis of the price move, we then apply a very popular tool called the Fibonacci tool to click and drag the other end of the Fibonacci tool to the end of the price move, where the price move terminated. You should find “100.0” in the top right hand of the Fibonacci tool and “0.0” at the bottom of the tool.”
Some of you are probably going “This confusing. Why is 100.00 starting at the beginning of a price move?” Well retracement basically means pullback. Meaning, that by the time the market goes into reversal mode, it goes back to where it started from. And if it retraces back up or down on the same move, it would have retraced to 100% . Let’s take a look at a 50% retrace in action on the EUR -USD pair
This, ladies, and gentlemen is an illustration of how to find the 50% retracement level of the EUR/USD pair in a downtrend. Now as you can see, the line is dragged with the assistance of the Fibonacci tool from the 100% level(as indicated by the orange line) all the way to the end of the price move. Now notice the price signal forming at the 50% retrace level. This signal takes place after the temporary reversal when price hits 1.4023.
Now let’s look at the drawing of the 50% retracement level on the uptrend using the USD/JPY pair.
Here is another illustration of finding the 50% retrace pattern, this time,on the uptrend. The Fibonacci tool draws the line from 100.0 all the way up to 0.0 where the trend ends. Notice the temporary reversal at the 50% retracement level where price finds support.
Now that we’ve identified how to find the 50% retrace, I guess the logical question will be:
How Do We trade price action signals from 50% Retracement Level?
Well, the moment your eyes tell you ” Hey we see a price signal on the chart” just use the Fibonacci tool to connect the signal to the 50% retracement level. So long as both scenarios match, you got yourself a trade.
Now if you can also spot a key level of resistance also that should make you say “This is great confluence going on here.”After spotting the price signal, you have two options. You can can enter at market prices, or wait for a pullback to tighten up your stop loss and reduce general risk to your trading position. Let’s take a look at a USD/CHF graphic
As you can see, price slides down to previous resistance level. See coincidence of the previous resistance level with the 50% Fibonacci level, which of course translates to confluence.
Now if you ‘ve forgotten what confluence is all about, check out my post Something Called Confluence.
That’s a wrap for ” Trade 50% Trade Retracement Strategy With Price Action Analysis” I hope you now have a clear understanding on how to find and trade 50% retracement patterns Just remember that whenever you spot 50% retracement patterns in a prevailing trend, it makes sense to label them on your chart and then be on the look out for any juicy price signals. You could make some huge moolah from these setups.
Til next time take care.
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