61# The Retracement Market Method Trading System

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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.

 

When a New Trend is Established

Step 1: New Trend Signal by the Default MACD

Signals: When the red (signal) line crosses the blue line upward and remains

below the blue line, this indicates an up-trend.

When the red (signal) line crosses the blue line downward and remains

above the blue line, this indicates a down-trend.

Rationale: The Default MACD tends to indicate a new trend earlier than the Moving

Average Lines.

 

 


Step 2Confirmation of New Trend by Moving Average Lines.

Signals: When the shorter 6-Hour Moving Average (black) Line is above the longer

23-Hour Moving Average (blue) Line, this confirms an up-trend.

When the shorter 6-hour Moving Average (black) Line is below the longer

23-Hour Moving Average (blue) Line, this confirms a down-trend.

Rationale: This is to ensure the new trend is not an “intra-day” retracement of the

previous trend and has sufficient momentum to continue in that direction.

 

Step 3Confirmation of New Trend by Parabolic SAR (Optional)

Signals: If it is an up-trend, the Parabolic Dots are below the price candles.

If it is a down-trend, the Parabolic Dots are above the price candles.

Rationale: The Parabolic SAR does not always indicate the same trend as the

Moving Average Lines. Hence it is not necessary for it to confirm the new

trend. The reason why we still need the Parabolic SAR is because it is

useful for guiding the trader in placing the stop loss when it is indicating

the same trend as the Moving Average Lines.

 

Step 4Indication 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.

If it is a down-trend, watch for the Stochastic to indicate a down-trend,

i.e. when the red-dotted line crosses the solid light blue line downward

with the red-dotted line above the solid light blue line after that. Then

check that both the Default MACD and the Moving Averages Lines are still

indicating down-trend.

Rationale: The purpose of waiting for the Stochastic to indicate the same trend as the

Default MACD and the Moving Average Lines is so that we can enter our

trade upon the end of the first “minor” intra-day retracement of the new

current trend. This will prevent us from chasing after the price and help us

to wait for it to retrace first before entering our trade.

(Note: Many traders make the mistake of entering their trades when the

price is due for an “intra-day” retracement instead of entering when the

intra-day” retracement has bottomed out for an up-trend or has topped off

for a down-trend.)

Step 5Entering of New Trade

If it is an up-trend, enter to buy at a price as close to the 6-Hour Moving

Average Line as possible. (The price can be below or above the 6-Hour

Moving Average Line.)

If it is a down-trend, enter to sell at a price as close to the 6-Hour Moving

Average Line as possible. (The price can be below or above the 6-Hour

Moving Average Line.)

Rationale: Since the Moving Average Lines are acting as the support or resistance

lines, and the 6-Hour Moving Average Line is the first line of defense,

therefore when we enter a trade, we enter it as close to the 6-Hour Moving

Average Line as possible, preferably not more than 10 pips (including the

spread) above the 6-Hour Moving Average Line for a buy trade and not

more than 10 pips below the 6-Hour Moving Average Line for a sell trade.

 

 

Step 6Placing of Stop Loss

If it is a buy trade, place your stop loss 5-10 pips below the 23-Hour

Moving Average Line, ensuring that the stop loss is at least 20 pips but not

more than 30 pips.

However, if the Parabolic Dots are also indicating the same trend as the

Moving Average Lines, then either the Parabolic Dots or the 23-Hour

Moving Average Line is acting as the third line of defense. Then the stop

loss is to be placed at about 5-10 pips below this third line of defense, and

at the same time ensuring that the stop loss is at least 20 pips but not

more than 30 pips.

If it is a sell trade, place your stop loss 5-10 pips above the 23-Hour

Moving Average Line, ensuring that the stop loss is at least 20 pips but not

more than 30 pips.

However, if the Parabolic Dots are also indicating the same trend as the

Moving Average Lines, then either the Parabolic Dots or the 23-Hour

Moving Average Line is acting as the third line of defense. Then the stop

loss is to be placed at about 5-10 pips above this third line of defense, and

at the same time ensuring that the stop loss is at least 20 pips but not

more than 30 pips.

Note: For the GBP/USD, a larger stop loss of up to 35 pips may be

needed due to its higher volatility.

 

Step 7Placing 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

In the event that the target profit is not reached, we will need to close the

open trade position manually, especially when the Moving Average Lines

have crossed each other.

It is also possible that the target profit may need to be adjusted due to

changing market conditions. One can always lower or raise the target

profit according to the changing market conditions.

(Note: Both stop loss and target profit are to be placed as an OCO (One

Cancel the Other) order so that when the stop loss is triggered, the

pending order for the target profit will be automatically canceled, and vice

versa when the target profit is reached, the pending order of the stop loss /

protective stop will also be automatically canceled.)

The monitoring and closing of open trade positions is covered in a later section.

Now we shall take a look at some examples from the hourly charts that show trade

signals indicating formation of new trends.

 

Identifying A ‘Buy’ Signal for a “New” Up-trend
Retracement Method

 Example 1: Identifying A ‘Buy’ Signal for a “New” Up-trend

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.

 

Example 2: Identifying A ‘Sell’ Signal for a “New” Down-trend

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-Hour

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.

 

 

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