Understanding retracements is vital when trading with my Beginners Forex strategy. Using retracements in your analysis will help you to measure the strength of an area of supply or demand.
My beginners Forex strategy is a logic based strategy that recognizes the market as having buyers and sellers. Using common sense we can see how strong these buyers or sellers are going to be ahead of time. One way of doing this is by measuring retracements.
In the charts above you can see two trade setups. In the first example the market has retraced a lot deeper before moving back to the area where the market started retracing from. Making the area of supply stonger.
In the second example the retracement is a lot shallower. Making the area of supply weaker as the sellers in the market have moved with less strength than the deeper retracement . So what makes a deeper retracement weaker and a shallower retracement stronger?
This is where our good friend logic comes in. The sellers in the first retracement were only able to push the market down 20 percent. Now does this make the sellers weaker or stronger than the if it they had retraced 80%?
The second retracement pushes the market down 80 percent with more selling strength than the sellers that were able to push the market 20 percent. Once the buyers have come back to where the retracement started we now have an additional piece of information about the strength of the market.
By using simple logic we have realised that the sellers that were able to push the market 80 percent are more likely to have selling pressure left over the sellers that were only able to push the market down 20 percent.
So when the market comes back up to a potential breakout area we have a much better idea about the chances it will have of breaking through an area of supply or demand. Analysing the depth of a retracement gives us a strong indication of the strength of the market when it pushes back after the retracement.
Now you know how to use retracements to measure the strength of an area of supply or demand you can now start combining this knowledge with the simple and false breakout strategy style of trading. If we were to have a weak retracement that moves down 20 percent. We know that when the buyers move back up there is an increased chance the market will break though our area of supply.
Therefore if the market is likely to break through an area of supply or demand we want to be using the simple breakout strategy. The simple breakout strategy is used to take buys or sells when the market breaks through an area of supply or demand.
Whereas if we can see a stronger retracement that has moved down 70 percent. When the buyers move back up to where the retracement started we know that there is less chance of our area being broken through.
Therefore if the market is less likely to break through an area of supply we want to be using the false breakout strategy, and really take advantage of this situation. By using the simple and false breakout strategies in this way we will have edge over every other trader who is not aware how to use retracements in their analysis.
So there are a few key points to remember about trading retracements.
- The deeper the retracement the weaker the market will be once it has moved back to the area you are looking to take a breakout trade from.
- A simple breakout style trade should be used around weaker areas of the market that have more chance of being broken.
- A false breakout style trade should be used around stronger areas of the market that have less chance of being broken.
There you have it, everything you needed to know about how to apply retracement analysis to my Beginners forex strategy you now have. Retracements will allow you to assess the strength of an area of supply or demand in a simple logical and extremely effective way.
Once you have mastered your understanding of retracements in Forex you will be well on your way to making profits with my Beginners Forex strategy.