A retracement is a trend where a stock either rises or falls against a trend. When accompanied by technical indicators, they can help traders understand whether or not the current trend will continue. Retracements can also help traders know whether a reversal will take place.
Difference between Retracements and Reversals
When it comes to CFD trading, a replacement is but a short-term or minor withdrawal in the index or stock price. What matters is the fact that the stock neither influences the downtrend or uptrend nor does it affect the crucial support level. When the price either falls or rises above resistance or affects the downtrend or uptrend, it becomes a reversal.
Importance of Retracements
Retracements allow you to navigate the market at a more friendly price. They facilitate enhanced risk-reward and optimum stop loss replacement. A retrace entry, for instance, would be conservative and safer compared to market entry. A CFD trader should strive to gain the ultimate entry price to manage risks and boost returns.
What are the Benefits of Retracement Trading?
Retracement trading offers numerous benefits as seen below.
Greater Probability Entries
The nature of retracement defines that price may remain in the same direction as it was when the retrace comes to an end. This means that when you spot a robust price action sign following a retracement. It could indicate a high probability entry seeing that all the signals display that the price will rebound from that specific point.
This, however, won’t always take place. However, waiting for the retracement to level out with a sign is the greatest probability you can leverage on to trade. Markets often fluctuate towards the average and mean price, a phenomenon which you can easily identify by taking a look at any price chart.
If you notice a retracement in the price chart, identify an entry point instead of entering the market. The latter is what many traders opt for.
Less Premature Stop Outs
A retracement creates more flexibility by activating the stop loss. With retracement, you can place the stop far from probable areas within the chart. Placing stop orders further enhances the trade’s chances of succeeding.
Enhanced Risk Rewards
Retracement entries enable cfd traders to place a stringent stop loss on a trade every time they approach the 50% pin bar level on the trade entry. If you opt for this strategy, you may want to place the stop loss closer than would be the case when you enter a trade that didn’t resurface after a retracement. This would be the same case if you activated a pin bar trade at the pin’s high or low
Retracement Trading Cons
Retracement comes with various cons just like any other concept. Still, these shouldn’t discourage you from using it, especially because the benefits override the cons. The cons include:
Missed Trades
Chances are that good trades will slip away while waiting for a retracement that eventually fails to take place. This could result in emotionally oriented decisions and will not only annoy beginners in the CFD trading industry, but they will also affect experienced traders.
Reduced Trades
Many times, markets won’t sufficiently retrace to be able to stimulate the conservative entry that is stimulated by a reversal. Rather, they’re likely to proceed with reduced retracements. This means CFD traders will get reduced trading chances when compared to traders who aren’t awaiting the retraces.
Retracement not only requires discipline, but it can frustrate CFD traders. Traders who develop discipline will be way ahead of their competitors. Retracement is an ideal strategy that can come in handy to help you build discipline. With discipline, you are guaranteed to succeed regardless of the method you use.
The forex trading market can be tricky, especially for beginners. While trading strategies work, beginners hardly are patient enough and will want instant results. If you are a beginner, understanding that strategies take time to produce results will make you more optimistic. Before using strategies such as retracement you want to understand their pros and cons and how they will affect your trade.