The trend trading strategy is the most efficient way to make a profit at the trading business. If you are new to this market, you might not know what the trend trading method is. The price of the financial instrument goes up and down in a rhythmic manner. But if you closely notice the price chart, you will notice the market is either going or down in the bigger time frame. When it goes up, we call it an uptrend. If the price of the asset drops down making new higher lows, we call it a downtrend. But in a trending market, you will notice a small pullback in the price.
Let’s say, the GBPUSD pair in the uptrend. Do you think the price will climb higher without exhibiting any bearish movement? Of course not! The minor movement in the price against the major trend is known as a retracement. Traders use retracement to find the exact point to execute the trades. In this article, we are going to get into the detail of price retracement so that you can trade the market like the smart traders at Saxo.
Retracement vs. reversal
Before you start learning about the retracement, you need to know what reversal is. When the price of an asset changes its direction completely, and start exhibiting the characteristics of a newly formed trend, it is known as a reversal. For instance, let’s say the GBPJPY pair is in the downtrend. So, it’s very obvious you will notice higher lows in the market. But all of a sudden the market started making lower highs and higher highs. Classic characteristics of the uptrend. So, instead of considering the bullish rally as a retracement, you should consider the price movement as a reversal.
On the other hand, reversal is usually a short moment of the price against the major trends. Most of the time, it becomes nearly impossible for the retail traders to execute the trades in favor of the trend without the help of retracement. Use this link to learn about the different aspects of trading and you will realize why retracement is so important for your career. Unless you learn to identify the retracement properly, you will depend on the bigger stop loss. If you trade the market with bigger stops, it will kill the risk to reward ratio.
Use of the Fibonacci retracement tools
Before you start trading the retracement, you should read about the Fibonacci retracement tool. Identifying the key swings of the highs and lows of the market is an easy task. Once you learn to do that, it’s time for you to draw the retracement levels. If you use the Fibonacci retracement tool, you have to rely on a higher period. Once the Fibonacci retracement levels are drawn, look for the trade setups in the 50% or 61.8% retracement level. Based on that, you should be executing the trades. However, if the price breaks below the 61.8% retracement level, consider it as a sign of major trend reversal.
Use of the stops
When you learn about retracement in the Forex market, you can start using the trailing stops. Naïve traders are always using minor swings of the market to place the stops. By doing so they are increasing the risk exposure to a great extent. But if you place the stops based on the retracement level it will be an easy task to manage the stop. Most importantly, you will have unique skills that you allow you to make a bigger profit in this market.
So far, we have highlighted the importance of retracement in the trading business. It’s now your duty to use the demo account so that you can make a bigger profit by utilizing the key retracement in the market. Those who are having trouble can enroll in an online course and get precise guidelines from the professional traders.