The Retracement Market Method

The Retracement Market Method is used in the following market conditions:

• When a new current trend, which can either be part of a major trend, a major retracement, a minor retracement, 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 a secondary retracement, continues with momentum after a major “intra-day” retracement.

Time Frame 15 min or higher. The examples are for TF 60 min.

Currency pairs: majors.

Forex Indicators:

MACD (12, 26, 90);

MACD (30, 60, 30);

Stochastic Oscillator (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 of New Trend by Parabolic SAR (Optional), if it is an up-trend, the Parabolic Dots are below the price candles.

Indication by the Stochastic to Enter a Trade at the End of the First “Minor” Intra-day Retracement of the New Trend Signals: If it is an up-trend, watch for the Stochastic to indicate an up-trend, i.e. when the red-dotted line crosses the solid light blue line upward with the red-dotted line below the solid light blue line after that. Then check that both the Default MACD and the Moving Average Lines are still indicating an up-trend.

Entering of New Trade

If it is an up-trend, enter to buy at a price as close to the 6 Moving Average Line as possible. (The price can be below or above the 6-Hour Moving Average Line.)

Since the Moving Average Lines are acting as the support or resistance lines, and the 6 Moving Average Line is the first line of defense, therefore when we enter a trade, we enter it as close to the 6- Moving Average Line as possible, preferably not more than 10 pips (including the spread) above the 6 Moving Average Line for a buy trade and notmore than 10 pips below the 6 Moving Average Line for a sell trade.

Sell (reverse conditions)

Placing of Stop Loss TF 60 min.

If it is a buy/sell trade, place your stop loss 5-10 pips below/above the 23 Moving Average Line, ensuring that the stop loss is at least 20 pips but not more than 30 pips.

Placing of Target Profit

The number of pips for our target profit is preferably to be around three times of our stop loss so as to satisfy the “ideal” risk-reward ratio of 1:3 or 33 percent. For example, if our stop loss is placed 25 pips away from our entry price, then our recommended target profit should be about 75 pips.

Target profit can be placed at either one of the following key price levels:

1. Daily Pivot Point and its respective R1, R2 and R3 and S1, S2 and S3, which is found on the Hourly Charts. (Note: This is for intra-day trading only).

2. Hourly and Daily Fibonacci Retracement Levels of 23.6%, 38.2%, 50% and 61.8%.

3. Hourly and Daily Historical Resistance and Support levels

4. Previous Week High and Low and Current Week High and Low

5. Previous Month High and Low Current Month High and Low

6. Key Psychological Levels (i.e. prices that ends with 00s or 50s)

7. Key Channel Bands and Trend Lines

Examples of trades

(the arrows on the chart are only for explanation).

1. Default MACD indicates an up-trend. (See Red Arrow pointing up.)

2. Both the Moving Average Lines and the Parabolic Dots confirm the up-trend. (See Black Arrow pointing up.)

3. Stochastic crosses upward and this indicates the timing to enter a “buy trade” (See Green Arrow pointing up.) Both the Moving Average Lines and the Parabolic Dots are still indicating an up-trend. Note that at this time, the price has retraced downward and is on the verge to move upward.

4. Buy as close to the 6-Hour Moving Average Line (Black) as possible with the above indicators still maintaining an up-trend signal, say at 1.3020. (See Blue Arrow pointing up.)

5. Place the stop loss 5 pips below the Parabolic Dot, which is at 1.2990, giving a stop loss of 30 pips.

6. Let’s assume that the open trade position is closed when the Moving Average Lines have crossed each other, say at 1.3120. (See Blue Arrow pointing down.) From here, we can see that this trade has the potential to earn about 100 pips over a period of 4 trading days, with a risk-reward ratio of about 30 percent.

1. Default MACD indicates an up-trend. (See Red Arrow pointing up.)

2. Both the Moving Average Lines and the Parabolic Dots confirm the up-trend. (See Black Arrow pointing up.)

3. Stochastic crosses upward and this indicates the timing to enter a “buy trade” (See Green Arrow pointing up.) Both the Moving Average Lines and the Parabolic Dots are still indicating an up-trend. Note that at this time, the price has retraced downward and is on the verge to move upward.

4. Buy as close to the 6-Hour Moving Average Line (Black) as possible with the above indicators still maintaining an up-trend signal, say at 1.9690. (See Blue Arrow pointing up.)

5. Place the stop loss near the 23-Hour Moving Average Line (since the Parabolic Dot is too far below the buy price), say at 1.9655, giving a stop loss of 35 pips. (Note: GBP/USD requires a higher stop loss.)

6. Let’s assume that the open trade position is closed when the Moving Average Lines have crossed each other, say 1.9750. (See Blue Arrow pointing down.) From here, we can see that this trade has the potential to earn about 60 pips over a period of 2 trading days, with a “high” risk-reward ratio of about 58 percent.

1. Default MACD indicates an up-trend. (See Red Arrow pointing up.)

2. Both the Moving Average Lines and the Parabolic Dots confirm the up trend. (See Black Arrow pointing up.)

3. Stochastic crosses upward and this indicates the timing to enter a “buy trade” (See Green Arrow pointing up.) Only the Moving Average Lines are still indicating an up trend. Note that at this time, the price has retraced downward and is on the verge to move upward. Here it is NOT necessary for the Parabolic Dots to also indicate an up-trend.

4. Buy as close to the 6 Moving Average Line (Black) as possible with the above indicators, except for the Parabolic Dots, still maintaining an up-trend signal, say at 1.2115. (See Blue Arrow pointing up.)

5. Place the stop loss 15 pips below the 23-Hour Moving Average Line (since it is very close to the buy price), which is at 1.2095, giving a stop loss of 20 pips.

6. Let’s assume that the open trade position is closed when the Moving Average Lines have crossed each other, say at 1.2155. (See Blue Arrow pointing down.) From here, we can see that this trade has the potential to earn about 40 pips over a period of 2 trading days, with a risk-reward ratio of about 50%.

1. Default MACD indicates a down-trend. (See Red Arrow pointing down.)

2. Both the Moving Average Lines and the Parabolic Dots confirm the down-trend. (See Black Arrow pointing down.)

3. Stochastic crosses downward and this indicates the timing to enter a “sell trade” (See Green Arrow pointing down.) Both the Moving Average Lines and the Parabolic Dots are still indicating a down-trend. Note that at this time, the price has retraced upward and is on the verge to move downward.

4. Sell as close to the 6-Hour Moving Average Line (Black) as possible with the above indicators, except the Parabolic Dots, still maintaining a down-trend signal, say at 1.3220. (See Blue Arrow pointing down.)

5. Place the stop loss 30 pips above the sell price at 1.3250 which is at the 23- Moving Average Line.

6. Let’s assume that the open trade position is closed when the Moving Average Lines have 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 about 220 pips over a period of 4 trading days, with a risk-reward ratio of about 14 percent.

Identifying a ‘ Signal for a “Continuation” trend

This initial step is to confirm that the ‘major” intra-day retracement, as indicated by the Default MACD, is NOT a new trend. This is probably the case as long as both the Long MACD and the Moving Average Lines continue to indicate the previous existing trend during the period when the Default MACD is indicating the “major” intra-day retracement. (Both the “major” intra-day retracement and the previous existing trend are opposite in direction.)

Trading Examples Continuation” trend

In the above chart, the Violet Arrow pointing up indicates the initial phase of the up- trend. The Red Arrow pointing down in the Default MACD window indicates the downward “major” intra-day retracement of the up-trend. But how can we confirm that this is a retracement and not a change in trend? This is where the Long MACD, together with the Moving Average Lines, will do the job for us. Notice that when the Default MACD is indicating a down-trend, the Long MACD continues to indicate an up-trend. There is nothing unusual about this as the Long MACD tends to lag behind the Default MACD. However, as long as the Moving Average Lines are still indicating an up-trend, together with the Long MACD, this indicates that the downward move is probably a “major” intra-day retracement and not a change in trend.

The following are the steps to entering a buy trade based on the “continuation” signal:

1. Default MACD indicates a down-trend. (See Red Arrow pointing down in the Default Window.)

2. Long MACD continues to indicate an up-trend. (See Red Arrow pointing up in the Long MACD Window.)

3. Both the Moving Average Lines and the Parabolic Dots are still indicating an up- trend. (See Black Arrow pointing up.)

4. Stochastic crosses upward and this indicates the timing to enter a ‘buy’ trade (See Green Arrow pointing up.) Both the Long MACD and the Moving Average Lines are still indicating an up-trend. Note that at this time, the price has retraced downward and is on the verge to move upward.

5. Buy as close to the 6-Hour Moving Average Line (Black) as possible while the Long MACD and the Moving Average Lines are still maintaining an up-trend signal, say at 120.90. (See Blue Arrow pointing up.)

6. Place the stop loss just below the Parabolic Dot at 120.60, giving a stop loss of 30 pips.

7. Let’s assume that the open trade position is closed when the Moving Average Lines have crossed each other, say at 121.70. (See Blue Arrow pointing down.) From here, we can see that this trade has the potential to earn about 80 pips over a period of 3 trading days, with a risk-reward ratio of about 38 percent.

In the above chart, the Violet Arrow pointing down indicates the initial phase of the down-trend. The Red Arrow pointing up in the Default MACD window indicates the upward “major” intra-day retracement of the down-trend. But how can we confirm that this is a retracement and not a change in trend? This is where the Long MACD, together with the Moving Average Lines, will do the job for us. Notice that when the Default MACD is indicating an up-trend, the Long MACD continues to indicate a down-trend. There is nothing unusual about this as the Long MACD tends to lag behind the Default MACD. However, as long as the Moving Average Lines are still indicating a down-trend, together with the Long MACD, this indicates that the upward move is probably a “major”

intra-day retracement and not a change in trend. The following are the steps to entering a sell trade based on the “continuation” signal:

1. Default MACD indicates an up-trend. (See Red Arrow pointing up in the Default Window.)

2. Long MACD continues to indicate the down-trend. (See Red Arrow pointing down in the Long MACD Window.)

3. The Moving Average Lines are still indicating the down-trend. (See Black Arrow pointing down.) Here it is NOT necessary for the Parabolic Dots to also indicate the down-trend.

4. Stochastic crosses downward and this indicates the timing to enter a “sell’ trade. (See Green Arrow pointing down.) Both the Long MACD and the Moving Average Lines are still indicating the down-trend. Note that at this time, the price has retraced upward and is on the verge to move downward.

5. Sell as close to the 6-Hour Moving Average Line (Black) as possible with the Long MACD and the Moving Average Lines still maintaining a down-trend signal say at 1.2240. (See Blue Arrow pointing down.)

6. Place the stop loss at 1.2260 which is just above the Parabolic Dot, giving a stop loss of 20 pips.

7. Let’s assume that the open trade position is closed when the Moving Average Lines have 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 about 75 pips over a period of 3 trading days, with a risk-reward ratio of about 27 percent.