What is the meaning of a foreign exchange retracement? How can foreign exchange traders handle retracements correctly in foreign exchange transactions?

Forex retracement, often referred to as forex percentage retracement, is a technical term that forex traders often hear when speculating in foreign exchange. Just enterforeign exchange marketAfter a while, you will start to hear the word "retracement" frequently. But for many foreign exchange investors, especially newbies, the meaning of foreign exchange retracement is not particularly understood. So, what exactly is a retracement and why does everyone talk about it? Why is a retracement so important and how can foreign exchange traders make better use of it? Let's learn together today.

What is a retracement?

In simple terms, a retracement is a period in the market where the price returns to its previous state, which may rise or fall. Just as we can walk forward or return to the original direction. A retracement is also a phenomenon of price reversal. For the K-line chart, the price falling from a high point to a low point is also called a retracement. For the funds in the account, a retracement is a decrease in the funds in the account within a certain period of time, usually on an annual or quarterly basis.

For example, when the foreign exchange market rises in a strong trend, it rises from the 100 level to the 200 level, and the subsequent correction is often a correction to half of that movement, around the 150 level.

So, why is it a FX percentage retracement? In fact, FX price trends can generally be divided into three equal parts. Usually the smallest retracement is around 33%, and the largest retracement is around 66%. During a strong trend correction, the market usually returns to one-third of its original movement. Two-thirds of the retracements are particularly critical areas. If the price correction exceeds this level, then a general trend reversal is possible.

In the process of foreign exchange retracement, there are several points that are very important, namely 33% and 37.5%, 62.5% and 67%. These three percentage levels of foreign exchange retracement are what investors must know more about. They are usually also called chopstick lines, which means that when the foreign exchange price retracement touches this price level, it will be caught by the "chopsticks" and cannot move. They are the two positions that are more effective. They are also the two most important proportions in our analysis of foreign exchange structure using percentage lines.

What is the withdrawal of account funds?

The indicator we measure the withdrawal of account funds is the withdrawal rate. The withdrawal rate is also (highest value - lowest value)/highest value. Generally, the initial capital * withdrawal rate of the account is used to measure the loss. In fact, the withdrawal rate can be understood as the loss rate over a period of time. For example, if the account originally had $1,000 and the withdrawal rate was 10%, it means that the loss was $100 during this period.

We often say that it is recommended that investors invest no more than 2% of their account capital in each transaction, meaning that the maximum risk we can take is a 2% retracement rate.

Because there may be multiple fund withdrawals in a period of time. At this time, the maximum fund withdrawal rate will be mentioned. The maximum fund withdrawal rate refers to the most serious period of capital withdrawal in a period of time. The corresponding is the risk that the account has to bear in the worst case.

Using the maximum retraction rate to measure an account's risk management ability is inevitably unfair, because the investment market can encounter surprises at any time. So you can use the average retracement to measure your risk management during this period in monthly, quarterly or annual reviews. The average retracement rate is also calculated in a simple way, which is the average retracement over a period of time. (Note that the maximum and minimum values with very large gaps are mentioned)

Here's an example.

For example, you originally had $1,000 in initial funds in your account, but within a week you lost so much that you almost had $100 left in your account. After that, you deposited a total of $3,500 in your account. Now you have gained experience and invested a lot more cautiously, but these funds still did not last for a month, and the account funds have fallen back to $200. You are no longer investing this month.

In this case, there are 2 withdrawals of account funds. The first withdrawal is from $1000 to $100, and the withdrawal rate is (1000-100)/1000 = 90%. The second withdrawal is from $3500 to $200, and the withdrawal rate is 94%. Your maximum withdrawal rate for this month is 94%. The average withdrawal rate for this month is 92%.

The retracement rate in the above case is too high, unless it is a local tyrant. What if the retracement rate is very high?

A high retracement rate doesn't actually mean that the person's trading ability is not good. It also depends on how long the retracement rate is. For example, if you lose $1,000, the retracement rate is the same, some people only use 1 week, while others use 1 year. So when looking at the retracement rate, you should also consider the length of the time period. The best retracement is to control your retracement rate to no more than 2% regardless of whether it is short or long.

Three attitudes towards withdrawal

1. Worry about withdrawal

Always reducing the retracement. As soon as there is a shock, I can't stand it. I'm always trying to reduce the retracement, add restrictions, and constantly optimize.

2. Accept the withdrawal

Understanding optimization and limiting conditions has huge side effects. Retracement is a cost, and it is unrealistic to significantly reduce retractions. Whether you can accept retractions calmly, face the shocks in trading calmly, and do nothing is a natural watershed for mature traders and Cainiao, and an important symbol of whether you can stabilize profits.

3. Thanksgiving withdrawal

It is precisely because of the retracement or the existence of a long-term retracement that a large number of undetermined traders swing, make wrong moves, and get into trouble. This is the best time for mature traders to clean their opponents. It is because of the retracement or the existence of a long-term retracement that ordinary traders mistakenly believe that their trading system has failed and give up one after another. When they give up, the system has actually ended the retracement period and entered the profitable track, and traders who know how to use the retracement are always undefeated.

"Richard is probably the best shooter I've ever met," said Erkiver, a student of Richard Dennis. "Even under great pressure, he can still hold his ground. When his opponents are on the verge of collapse, he pulls the trigger unexpectedly."

Just like the four seasons of spring, summer, autumn and winter in nature, it cannot always be a hot summer without a severe winter. The colder the winter, the more pests will freeze to death, and the better the harvest will be in the second year without the trouble of pests.

Traders who understand gratitude retracement have begun to get rid of the primary stage of emphasizing only their own difficulties without observing the difficulties of their opponents, have begun to get rid of the troubles of relative phenomena in trading, and have begun to get rid of the psychological rejection of trading phenomena. Gradually enter the realm of Tao.

How to properly handle retracements in transactions?

Encountering a retracement is not terrible. What is terrible is that if you don't solve the problem, retaliating against the market will only make your retracement rate even greater. To handle the retracement problem well, in fact, it is to establish your own risk management plan.

There are two common ways to treat retracements: one is to establish a position reasonably, regardless of market fluctuations, and the other is to operate on a rolling basis, with the position unchanged and the cost of capital changing according to the market.

If you use the second approach, you need to grasp market reversals and deviations in real time, and you need to be more skilled in the application of K-line patterns and technical indicators, with sufficient time.

Therefore, I still recommend the first approach, fixing the position, first determine the maximum risk you can take, determine the maximum drawdown rate, and then plan the size of your position.

How to make a healthy retracement? Control a "healthy" retracement?

First, a retracement is simply a function of probability and expected payoff, and outcomes tend to aggregate. For example, you might have a 50% chance of winning, but that doesn't mean you'll run into losers several times in a row - just as you might run into winners several times in a row. It's just the result of probability (think of a coin toss).

Secondly, there are also some capital withdrawals that are manageable due to the execution of the trading plan and market conditions. A capital withdrawal can actually be attributed to the fact that your trading strategy is not good enough, or the market environment is not conducive to your strategy, so you may need to take a temporary break. For example, a trader may encounter problems when trying to break out of a range and need to take a step back. Usually, a drawdown usually occurs in the event of difficult trading conditions and minor trading errors.

We can't be perfect under any circumstances, so you need to be aware and face it. If the current trade is not going well, it is always a prudent decision to reduce the size of the trade. There is a saying we often hear: "When in doubt, wait or withdraw". This phrase has always applied to trading. Sticking to this principle will go a long way towards pausing retracements. This is a good time to check yourself to see if you are making the right trades and handling the risks properly. Whether your current trading situation is good or bad, it is recommended that you keep reviewing your trades and follow the plan.

One of the most common and clear causes of bad results is over-trading and poor risk management. When things don't go your way, you need to consider both causes first because they are things you can control and correct immediately.

Different withdrawal transaction methods:

1. Retracement entry without price signal

When the price retreats to the key technical level, there is no obvious price signal here, but it can be seen that the price will fall immediately after piercing the key level. This is the best stop-loss position and entry point, which may also pose a very high risk/reward for traders.

2. Cooperate with the price pattern and return to the key position

Prices retrace up or down to key positions on the daily chart, and then observe the apparent price patterns that form there.

3. Retracement to the moving average (average price)

The market tends to revert to the mean, which can be seen through the moving average. If the price retracts to this vicinity, then you should pay close attention to whether any price action signals are also emerging:

4. Retreat to the 50% area

Prices tend to retrace near 50% of the major fluctuations. If you look closely at any chart, you will find that this phenomenon occurs frequently. Therefore, we can keep an eye out for retracements near these 50% areas. After the retracement is over, the price will continue to move as before. Even if this phenomenon does not occur every time, it occurs so frequently that it can be used as an important tool for our retracement trades:

5. Retreat into the field in the candlestick or signal area as a signal

When there is a pin bar reversal signal, the retracement distance of the next K line is half of the pin bar, which provides you with a good entry point.

In addition, if you enter the market while waiting for a pullback and enter the 50% retracement level, you can obtain a 4R profit.

6. Retreat to key positions

When the price retracements to the key position we are talking about, this is a very high probability area for finding trades. For example, if the price retracements to the key position, a pin bar signal is formed in that area, and then another pin bar signal is formed before the price falls.

The advantages of retracement transactions

The essence of a retracement is that when the retracement ends, the price will continue to move in the previous direction. Therefore, a retracement provides a good entry opportunity, and if the price action signal appears after the retracement, it means the entry of a high profit possibility.

Fewer stop-loss settings that are eliminated early. Retracements make stop-loss settings more flexible. You can set stops farther away from the area where they may be triggered, such as away from important price levels or moving averages.

Better risk-reward ratio. In theory, a retracement entry allows you to set a tighter stop loss because you are entering closer to the key price. A tighter stop loss means a better risk-reward ratio. Of course, it is up to you to set a tighter stop loss.

Even if you don't choose a tighter stop loss at this time, but still choose a normal stop loss range, the risk-reward of the trade still becomes better. The original 100-point stop loss and 200-point profit target are now 100-point stop loss and 250-point profit target, because when the retracement enters the market, the retracement space becomes part of your profit at this time.

Of course, retracement also has its drawbacks.

Disadvantages of retracement transactions

1. More trading opportunities will be missed. While waiting for the retracement, you may miss more trading opportunities, or even some better ones than the retracement.

2. Fewer trading opportunities. As mentioned above, more trading opportunities are missed, but at the same time, there are relatively few opportunities for retracement transactions. So this requires stricter trading discipline through retracement transactions.