The Retracement Market Method is usedin the following market conditions:
• When a new current trend, which caneither be part of a major trend, a major retracement, a minorretracement, or a secondary retracement, is established.
• When an existing current trend,which can either be part of a major trend, a major
retracement, a minor retracement, or asecondary retracement, continues with momentum after a major“intra-day” retracement.
Time Frame 15 minor higher. The examples are for TF 60 min.
Currency pairs:majors.
Forex Indicators:
MACD (12, 26, 90);
MACD (30, 60, 30);
StochasticOscillator (5,3,3,);
Parabolic SAR(0.02 – 0.2);
23 EMA, close;
6 EMA, close.
Trading rules
Buy
When the shorter 6 Moving Average (black) Line is above the longer 23 Moving Average(blue) Line, this confirms an up-trend.
Confirmation ofNew Trend by Parabolic SAR (Optional), if it is an up-trend, theParabolic Dots are below the price candles.
Indication by theStochastic to Enter a Trade at the End of the First “Minor”Intra-day Retracement of the New Trend Signals: If it is anup-trend, watch for the Stochastic to indicate an up-trend,i.e. when the red-dotted line crosses the solid light blue lineupward with the red-dotted line below the solid light blue line afterthat. Then check that both the Default MACD and the Moving AverageLines are still indicating an up-trend.
Entering of New Trade
If it is anup-trend, enter to buy at a price as close to the 6 Moving AverageLine as possible. (The price can be below or above the 6-Hour MovingAverage Line.)
Since the MovingAverage Lines are acting as the support or resistance lines, and the6 Moving Average Line is the first line of defense, therefore whenwe enter a trade, we enter it as close to the 6- Moving Average Lineas possible, preferably not more than 10 pips (including the spread)above the 6 Moving Average Line for a buy trade and notmore than 10pips below the 6 Moving Average Line for a sell trade.
Sell (reverse conditions)
Placing of Stop Loss TF 60 min.
If it is abuy/sell trade, place your stop loss 5-10 pips below/above the 23Moving Average Line, ensuring that the stop loss is at least 20 pipsbut not more than 30 pips.
Placing of Target Profit
The number of pipsfor our target profit is preferably to be around three times of ourstop loss so as to satisfy the “ideal” risk-reward ratio of 1:3or 33 percent. For example, if our stop loss is placed 25 pips awayfrom our entry price, then our recommended target profit should beabout 75 pips.
Target profit canbe placed at either one of the following key price levels:
1. Daily PivotPoint and its respective R1, R2 and R3 and S1, S2 and S3, which isfound on the Hourly Charts. (Note: This is for intra-day tradingonly).
2. Hourly andDaily Fibonacci Retracement Levels of 23.6%, 38.2%, 50% and 61.8%.
3. Hourly andDaily Historical Resistance and Support levels
4. Previous WeekHigh and Low and Current Week High and Low
5. Previous MonthHigh and Low Current Month High and Low
6. KeyPsychological Levels (i.e. prices that ends with 00s or 50s)
7. Key ChannelBands and Trend Lines
Examples of trades
(the arrows on thechart are only for explanation).
1. Default MACDindicates an up-trend. (See Red Arrow pointing up.)
2. Both the MovingAverage Lines and the Parabolic Dots confirm the up-trend. (See BlackArrow pointing up.)
3. Stochasticcrosses upward and this indicates the timing to enter a “buy trade”(See Green Arrow pointing up.) Both the Moving Average Lines and theParabolic Dots are still indicating an up-trend. Note that at thistime, the price has retraced downward and is on the verge to moveupward.
4. Buy as close tothe 6-Hour Moving Average Line (Black) as possible with the aboveindicators still maintaining an up-trend signal, say at 1.3020. (SeeBlue Arrow pointing up.)
5. Place the stoploss 5 pips below the Parabolic Dot, which is at 1.2990, giving astop loss of 30 pips.
6. Let’s assumethat the open trade position is closed when the Moving Average Lineshave crossed each other, say at 1.3120. (See Blue Arrow pointingdown.) From here, we can see that this trade has the potential toearn about 100 pips over a period of 4 trading days, with arisk-reward ratio of about 30 percent.
1. Default MACDindicates an up-trend. (See Red Arrow pointing up.)
2. Both the MovingAverage Lines and the Parabolic Dots confirm the up-trend. (See BlackArrow pointing up.)
3. Stochasticcrosses upward and this indicates the timing to enter a “buy trade”(See Green Arrow pointing up.) Both the Moving Average Lines and theParabolic Dots are still indicating an up-trend. Note that at thistime, the price has retraced downward and is on the verge to moveupward.
4. Buy as close tothe 6-Hour Moving Average Line (Black) as possible with the aboveindicators still maintaining an up-trend signal, say at 1.9690. (SeeBlue Arrow pointing up.)
5. Place the stoploss near the 23-Hour Moving Average Line (since the Parabolic Dot istoo far below the buy price), say at 1.9655, giving a stop loss of 35pips. (Note: GBP/USD requires a higher stop loss.)
6. Let’s assumethat the open trade position is closed when the Moving Average Lineshave crossed each other, say 1.9750. (See Blue Arrow pointing down.)From here, we can see that this trade has the potential to earn about60 pips over a period of 2 trading days, with a “high”risk-reward ratio of about 58 percent.
1. Default MACDindicates an up-trend. (See Red Arrow pointing up.)
2. Both the MovingAverage Lines and the Parabolic Dots confirm the up trend. (See BlackArrow pointing up.)
3. Stochasticcrosses upward and this indicates the timing to enter a “buy trade”(See Green Arrow pointing up.) Only the Moving Average Lines arestill indicating an up trend. Note that at this time, the price hasretraced downward and is on the verge to move upward. Here it is NOTnecessary for the Parabolic Dots to also indicate an up-trend.
4. Buy as close tothe 6 Moving Average Line (Black) as possible with the aboveindicators, except for the Parabolic Dots, still maintaining anup-trend signal, say at 1.2115. (See Blue Arrow pointing up.)
5. Place the stoploss 15 pips below the 23-Hour Moving Average Line (since it is veryclose to the buy price), which is at 1.2095, giving a stop loss of 20pips.
6. Let’s assumethat the open trade position is closed when the Moving Average Lineshave crossed each other, say at 1.2155. (See Blue Arrow pointingdown.) From here, we can see that this trade has the potential toearn about 40 pips over a period of 2 trading days, with arisk-reward ratio of about 50%.
1. Default MACDindicates a down-trend. (See Red Arrow pointing down.)
2. Both the MovingAverage Lines and the Parabolic Dots confirm the down-trend. (SeeBlack Arrow pointing down.)
3. Stochasticcrosses downward and this indicates the timing to enter a “selltrade” (See Green Arrow pointing down.) Both the Moving AverageLines and the Parabolic Dots are still indicating a down-trend. Notethat at this time, the price has retraced upward and is on the vergeto move downward.
4. Sell as closeto the 6-Hour Moving Average Line (Black) as possible with the aboveindicators, except the Parabolic Dots, still maintaining a down-trendsignal, say at 1.3220. (See Blue Arrow pointing down.)
5. Place the stoploss 30 pips above the sell price at 1.3250 which is at the 23-Moving Average Line.
6. Let’s assumethat the open trade position is closed when the Moving Average Lineshave crossed each other, say at 1.3030. (See Blue Arrow pointing up.)From here, we can see that this trade has the potential to earn about220 pips over a period of 4 trading days, with a risk-reward ratio ofabout 14 percent.
Identifying a ‘ Signal for a“Continuation” trend
This initial stepis to confirm that the ‘major” intra-day retracement, asindicated by the Default MACD, is NOT a new trend. This is probablythe case as long as both the Long MACD and the Moving Average Linescontinue to indicate the previous existing trend during the periodwhen the Default MACD is indicating the “major” intra-dayretracement. (Both the “major” intra-day retracement and theprevious existing trend are opposite in direction.)
Trading Examples Continuation”trend
In the abovechart, the Violet Arrow pointing up indicates the initial phase ofthe up- trend. The Red Arrow pointing down in the Default MACD windowindicates the downward “major” intra-day retracement of theup-trend. But how can we confirm that this is a retracement and not achange in trend? This is where the Long MACD, together with theMoving Average Lines, will do the job for us. Notice that when theDefault MACD is indicating a down-trend, the Long MACD continues toindicate an up-trend. There is nothing unusual about this as the LongMACD tends to lag behind the Default MACD. However, as long as theMoving Average Lines are still indicating an up-trend, together withthe Long MACD, this indicates that the downward move is probably a“major” intra-day retracement and not a change in trend.
The following arethe steps to entering a buy trade based on the “continuation”signal:
1. Default MACDindicates a down-trend. (See Red Arrow pointing down in the DefaultWindow.)
2. Long MACDcontinues to indicate an up-trend. (See Red Arrow pointing up in theLong MACD Window.)
3. Both the MovingAverage Lines and the Parabolic Dots are still indicating an up-trend. (See Black Arrow pointing up.)
4. Stochasticcrosses upward and this indicates the timing to enter a ‘buy’trade (See Green Arrow pointing up.) Both the Long MACD and theMoving Average Lines are still indicating an up-trend. Note that atthis time, the price has retraced downward and is on the verge tomove upward.
5. Buy as close tothe 6-Hour Moving Average Line (Black) as possible while the LongMACD and the Moving Average Lines are still maintaining an up-trendsignal, say at 120.90. (See Blue Arrow pointing up.)
6. Place the stoploss just below the Parabolic Dot at 120.60, giving a stop loss of 30pips.
7. Let’s assumethat the open trade position is closed when the Moving Average Lineshave crossed each other, say at 121.70. (See Blue Arrow pointingdown.) From here, we can see that this trade has the potential toearn about 80 pips over a period of 3 trading days, with arisk-reward ratio of about 38 percent.
In the abovechart, the Violet Arrow pointing down indicates the initial phase ofthe down-trend. The Red Arrow pointing up in the Default MACD windowindicates the upward “major” intra-day retracement of thedown-trend. But how can we confirm that this is a retracement and nota change in trend? This is where the Long MACD, together with theMoving Average Lines, will do the job for us. Notice that when theDefault MACD is indicating an up-trend, the Long MACD continues toindicate a down-trend. There is nothing unusual about this as theLong MACD tends to lag behind the Default MACD. However, as long asthe Moving Average Lines are still indicating a down-trend, togetherwith the Long MACD, this indicates that the upward move is probably a“major”
intra-dayretracement and not a change in trend. The following are the steps toentering a sell trade based on the “continuation” signal:
1. Default MACDindicates an up-trend. (See Red Arrow pointing up in the DefaultWindow.)
2. Long MACDcontinues to indicate the down-trend. (See Red Arrow pointing down inthe Long MACD Window.)
3. The MovingAverage Lines are still indicating the down-trend. (See Black Arrowpointing down.) Here it is NOT necessary for the Parabolic Dots toalso indicate the down-trend.
4. Stochasticcrosses downward and this indicates the timing to enter a “sell’trade. (See Green Arrow pointing down.) Both the Long MACD and theMoving Average Lines are still indicating the down-trend. Note thatat this time, the price has retraced upward and is on the verge tomove downward.
5. Sell as closeto the 6-Hour Moving Average Line (Black) as possible with the LongMACD and the Moving Average Lines still maintaining a down-trendsignal say at 1.2240. (See Blue Arrow pointing down.)
6. Place the stoploss at 1.2260 which is just above the Parabolic Dot, giving a stoploss of 20 pips.
7. Let’s assumethat the open trade position is closed when the Moving Average Lineshave crossed each other, say at 1.2165. (See Blue Arrow pointing up.)From here, we can see that this trade has the potential to earn about75 pips over a period of 3 trading days, with a risk-reward ratio ofabout 27 percent.
