Part 1: Retracement Entry Techniques
What is a Retracement Entry?
A retracement entry is a trade technique where you enter a trade on a price retracement of a price action signal. A retracement entry not only gets you in at a better price but can provide 2-3 times or greater the RR you would get entering at the break of the price action candle. A retracement entry is built upon the idea that the price action pin bar or other candle formation has already confirmed a false break and potential price reversal. Entering at a retracement can be slightly more risky, but the reward for a well place retracement entry can be tremendously larger than the added risk.
Why Retracement Entries Work
There is a common misconception, which is that a break of the candlestick āconfirmsā the candle. In reality the candle itself is confirmation of what we are looking for as price action traders. We often look for price reversals. This means that price is traveling in one direction, and then forms a large rejection candle telling us that the market perceives the asset as overpriced, and that price may reverse in the near future. The pin bar, engulfing bar and 2 bar reversal is the confirmation we are looking for. Many times price does not immediately reverse after forming a price action rejection candle(s). This is because there needs to be a complete shift in supply/demand before the reversal can occur, which can sometimes take hours or even days. While the market is making that shift, many times price will move up and down within the body of the price action candle. This price retracement of the candle body can provide us with opportunities to get in the trade at a better price and greatly increase the RR of the trade. While price is moving within the body of the price action candle, it will often run into minor resistance that keeps it from moving higher. We can place entry orders at these areas of resistance to get in our trade at the best price, while at the same time having a buffer between our retracement entry and stop loss.
Retracement vs. Break Entry
In price action trading, I donāt believe in one size fits all trading rules. While creating a simple set of rules may make it easier for a beginner trader, a trader should grow in his understanding of the market and learn how to apply different techniques to different setups. This idea applies to entry techniques. I donāt believe a retracement entry is right for every trade, and I also donāt believe a break entry is right for every trade. Once a trader learns how to analyze market structure, he/she can pick the right technique for that specific trade. If a trader stays focused on trading only the best price action setups and using proper retracement entry techniques, much more profit can be made from the trade with very little added risk break entry. Retracement entries have been a complete game changer in my personal trading and I have seen it become a game changer for others also.
Retracement Techniques
Major/Minor Support and Resistance
In the same we that we look for major support and resistance areas for price action signals to form, we can use these same areas to place retracement entry orders. These support and resistance areas have already rejected price once(thus giving us our price action candle(s)), and it is likely it will reject future attempts at price breaks. These S/R areas are the first place to considering setting an entry order. There are two cases where this type of retracement entry is not optimal. One is that the S/R line is right up against the body, which means it doesnāt provide much room for retracement. In that case you may want to look for another area for a retracement entry, or enter at the break of the candle. The other case this entry is not optimal is when the S/R line is at the very opposite end of the price action candle. These are the cases where the price action candle barely touches the S/R level, rather than being āup inā the S/R area showing a good false break.
Previous or Proxy Candle High/Low
If there is not an optimal S/R area to set an entry at, the next best retracement areas are a previous candles high/low or proxy candle. If there is a previous candle high that is midway up the price action candle, this can create a great place for an entry order. If the previous candle does not offer an area for retracement, there may be a proxy candle from a previous swing that will offer an area for a retracement entry. The proxy candle is not the previous candle but a candle from a previous swing. The reason this is the next best area is because candle highs/lows can help create minor resistance areas.
50% Retracement
This is the final resort for a retracement entry if there are no optimal S/R areas or previous candle high/low to set an entry from. The 50% retracement comes from the idea that price tends to revert to its mean, which means that price may travel halfway up the price action candle before reversing. This retracement technique strikes a balance between getting in at a good retracement level, while still having a good chance that your retracement will be hit. This is a last resort entry technique if there are not other optimal areas to enter at.
When Not to Use Retracement Entries
There are times where it is better to use an entry at the break of the candle. This can be when the S/R level or previous candle high is too close to the break of the candle, or when you are entering a counter trend trade. In the case of your potential entry areas being too close to the candle break, the retracement would provide little extra benefit. The reason we accept the extra risk, is because the benefit from successful retracement entries is far greater than the added risk. When the entry areas provide little extra benefit for the added risk, some traders may just enter at the break of the PA candle or try for the 50% retracement technique. The other situation where you may not want to use a retracement entry is in counter trend trades. Counter trend trades by nature have extra risk. If you are not experienced in filtering out poor quality counter trend PA setups, entering at the break may help keep you out of poor quality trades. Due to the added risk of a counter trend trade, entering at the break helps level out the risk of the trade. Ultimately it is up to the trader to understand his/her own abilities in finding high quality trades and then deciding how much risk they are willing to accept for a given reward.
Conclusion
We can see that retracement entries can provide much greater RR trades while adding in a minimal amount of extra risk. It is still important to understand you will lose more trades this way, but you are accepting losses for the much greater rewards from your winning trades. Many beginner traders believe success is all about win rate, and many price action teachers try to sell their methods claiming high win rate %. This is erroneous if not down-right deceptive. Many new traders are sucked into this belief that a high win rate equals success in trading.
As long as you are achieving risk reward setups that justify your win rate, then it really does not matter what your win rate is. I.E. if you are achieving 1:10 RR on your trades, then a 20% win rate would mean you are a very successful and profitable trader. If you are achieving a 50-60% win rate and 1:1 RR entering at candle breaks only, then adopting retracement entry techniques may drop your win rate to 40%, but your overall RR may increase to a 1:2 or 1:3. That means you are giving up 10-20% of your wins for a 100-200% increase of profits from your winner. It is obvious the retracement trader is making a significantly larger amount of money in the long run. On a final note, it is important to remember that retracement entries will not work for you if you are taking poor quality setups. Entering at the break may allow the trader to avoid getting into poor quality PA setups. A retracement entry guarantees you will enter the trade, which means you must be confident that the trade is high quality. If you are choosing high quality trades, then you will find retracement entries will succeed almost as often as entering at the break of the PA candle(s). If you dedicate yourself to mastering the skill of taking only the best trades, then retracement entries can skyrocket your profits.
