Retracement Interpretations ...............................
The concept of retracements is one of the main keys that unlock the door to predicting price movements and picking low risk entry points. They give the trader a reference point for predicting where the price turns might occur, and they also serve as a way to measure just how strong the preceding move was.
In its most basic form, a retracement is a price move in the exact opposite direction of the most recent price move.
It should be noted that the most important retracement levels for traders are 40, 50, 60 and 100 percent, also known as a double bottom.
1. Key retracement levels are general guidelines or areas, not exact points.
2. If a stock experiences a shallow retracement (40% or less), the prior move is considered to be strong, and as a result the counter move should be strong.
3. If a stock experiences a deep retracement (60% or greater), the prior move is considered weak, and as a result the countermove should be weak.
4. The first retracement after a strong up move is buyable nearly 100% of the time.
5. The first retracement after a strong down move is sellable nearly 100% of the time.
6. A 40% retracement after a strong advance is typically followed by a move to a new high.
7. A 40% retracement after a strong decline is typically followed by a move to a new low.
8. A 50% retracement after a strong advance often leads to a move with a 50/50 chance of exceeding the prior high. The same applies in reverse.
9. A 60% retracement after a strong advance often leads to a move with a 1 in 3 chance of exceeding the prior high. The same also applies in reverse.
10. A 100% downside retracement, which sets up a potential double bottom, is typically followed by a 50 to 60 percent rebound.
11. A 100% upside retracement is typically followed by a 50 to 60 percent decline.
12. Excellent entry points present themselves at or near all key reversal points: 40, 50, 60 and 100 percent. However, the objectives on each are quite different.
How To Play Retracements:
1. The trader looks for buying and selling opportunities at all key retracement levels: 40, 50 60 and 100 percent.
2. The trader looks to take profits decently above the prior high on shallow retracements. (This is the concept behind the snap back up strategy.) The same applies in reverse.
3. The trader looks to take profits at or slightly above the prior high on 50% retracements. The same applies in reverse.
4. The trader looks to take profits slightly below the prior high on 60% retracements. The same applies in reverse.
5. After a 100% retracement, the master trader looks to take profits on the counter move between 40 and 50 percent levels.
Source:
Tools And Tactics For The Master Day Trader. |
