Basic Retracement Entry Methods
Last month I had the pleasure of doing a private coach program, sometimes I work one on one and sometimes I teach a small group of traders, but only one group at a time.
For example if the trading is an effort between family members, friends or business associates, then it makes sense for me to work with everyone in the group at the same time.
They Became Indicator Junkies
This particular group had three business associates who were friends from childhood. After speaking for a few hours with the different members of the group I learned that they became indicator junkies, plain and simple.
They have been trading together for several years and were doing quite well, following the same strategy for several years and just got bored with the routine.
During the last few months the group began spending tens of thousands of dollars on every imaginable indicator and trading strategy that was publicly available, their office looked like Toys R Us for traders. Moreover, they began arguing between each other and stopped getting along.
After speaking with each trader alone and as a group I found out that their main entry strategy, the one they used for years consisted of a 3 bar retracement strategy.
They learned this strategy while in college and traded stocks and commodities with this strategy for the last 14 years.
They never bothered with advanced charts or quotes and just used free internet charts and quotes for all their analysis. About 6 months earlier, the group went to local Trading Expo and as they say the rest is history.
They were looking at several indicators, multiple monitors, 3 different analysis software and were talking about all sort of fancy indicators to become better traders. The problem was that none of these indicators were actually helping them make money, each time the new indicator went into a draw down (losing money) they would abandon it in favor of another one and this pattern has been going on now for several months.
I quickly realized the problem and told the group to disconnect all indicators, analysis systems and everything else they were using and for the next 2 days to just trade the simple retracement entry that they have been using for over a decade. By the time I left their office the three partners were friends again and promised that they wouldn’t use any of those fancy indicators ever again.
The partners were so happy to go back to their routine that they gave me permission to demonstrate their retracement entry strategy here. Their strategy consists of a few extra parts but here’s the main part of the strategy.
Long entry rules
Applies to all time frames
Wait for market to make 15 bar high in price.
Next three bars must have lower closes than the previous bar
Go long fourth bar if it trades above the close of the third bar
Place sell stop if market trades 1 tick below 4 bar low
Short entry rules
Applies to all time frames
Wait for market to make 15 bar low in price
Next three bars must have higher closes than the previous bar
Go short fourth bar if it trades below the close of the third bar
Place buy stop 1 tick above 4 bar high
Let me give you some visual examples so you can get a good feel for how this retracement entry looks visually:
Looking at the examples above, this retracement entry strategy is fairly easy to identify on a chart and doesn’t require any technical tools other than a bar chart.
You can utilize this entry method on just about any market that demonstrates good volatility and trading range. The stronger the overall trend of the market you are trading the better the odds that the retracement is likely temporary pause in the trend.
Don’t forget that this strategy works exactly the same way in a strong downtrend as it does in an uptrend. Just look for 3 consecutive higher bars and when the 4th bar trades below the 3rd bars closing price, it will signal an entry going short.
The lesson I want you to get out of this article is that great entry strategies don’t always have to be complicated and made up of complex indicators.
Most floor traders use very simple opening range breakouts and other simple entries that have been around for decades and they continue to work overtime just as well as they did in the past.
Many traders have a false belief that complex indicators and large monitors will make them a better trader and in reality that’s just not true.
The best advice is to find an indicator that you are comfortable with and trade using that indicator till you are consistently profitable using it, only then should you consider adding other indicators to your trading plan.
For more on this topic, please go to: Technical Analysis Tools – Moving Average Crossover Tactics and How To Analyze Stocks Using Technical Analysis
Good luck in your trading!