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 2: Confirmation 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 3: Confirmation 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 4: 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.
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 5: Entering 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 6: Placing 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 7: 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%
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.
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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Write a comment
ananth (Wednesday, 13 February 2019 05:02)
indicator pls?