Anyone interested in trading the financial markets has heard of the word ‘retrace’ or ‘retracement’ before. However, very few know why price retracements are important or how to take full advantage of them. A retracement in the forex market is easy to define and understand; it is when a price retraces back on a move, it could go or down.
Retracing therefore is basically reversing a recent price move. However, retracements are crucial because they provide an opportunity to enter the forex market at a better price. They also improve risk-reward, allow for optimal stop loss placement and more.
A retrace entry is considered a safe entry type because it is more conservative than the market entry. The goal of every forex trader is to get the best entry price and find the best way to manage risk to increase their returns. Retracement entry helps you do all these things with ease.
Advantages of Retracement in Forex Trading
High probability entry
A retrace or pull back means that the price will keep moving in the initial move’s direction when the retrace ends. When all signs point to a price bouncing from a particular point, especially when the price action signal is strong which is a very high probability entry.
Waiting for a retrace with a signal to a level is the highest probability way to forex trade. Forex markets rotate back to the average or mean price overtime, which is clear when you look at any price chart. Hence, when you see the retrace or rotation happen, you should start looking for an entry point to leverage the high probability entry point. This will help you to avoid entering the market like most traders do.
Better risk rewards
A retracement entry allows you to place a tight stop loss on a forex trade because you enter closer to the key level on a trade entry trick. Hence, if the need arises, you can place a stop closer than you would have if you entered a pin bar trade at the low or high of the pin or if you entered a trade that didn’t happen after a retrace.
If you use a standard stop loss, a risk reward can be slightly increased. This is because a retrace entry allows you to enter a market when there is more room to suit you since the price pulls back allowing you more distance to move before the price retraces again.
Reduced premature stop-outs
A retracement gives you more flexibility when using stop-loss placement. This is because you can place the stop far from the chart area that is likely to be hit. You will get a higher chance of your trade working out if you place stops far from moving averages or key levels or far from a pin bar low or high.
You can easily get knocked out of a trade prematurely if you place your stop loss at the wrong point. By leveraging retracement or waiting for the market to pull back, you will enter the forex market at a high probability point and be able to place your stop loss at a safer point on your chart.
Disadvantages of Retracement Trading
Sometimes when traders are waiting for a retracement, good trades can get away. When you wait for a retracement and it doesn’t happen your trading mindset and nerves will test you which can annoy even the best traders. however, missing out on trades isn’t the worst thing because it is better to miss out a trade than to over trade.
Unfortunately, the forex market doesn’t retrace enough to effectively trigger a more conservative entry that will come back with a pull back. This means that they may keep going with minimal retracements leaving you with less chances to trade overall compared to a trader who doesn’t primarily wait for the retraces.
Understanding what price action retracement, why they are crucial, and how to trade them could be the pass you need to success in forex trading. However, retracement trading can also be frustrating which is why you should have incredible discipline. By developing this discipline, you will be ahead of the trading losing trades. retracement can help you develop the right mindset to succeed at forex trading.