How to identify Trend Retracements

 You can identify trend retracements in Forex in various ways.

In this lesson we will see how to identify trend retracements in forex using Trendlines and Fibonacci.

But first, let’s define retracements

What are trend retracements

Retracements are just short term price reversals in the major price trend.

The retracements do not last for long before the trend resumes its original direction. 

They can be identified by drawing a trend line connecting at least three price higher lows for an uptrend  or lower highs for a downtrend.

You can also use retracements to generate trading signals and you have to trade in the direction of the main trend.

How to trade retracements on a trend line

As prices hang along the major trend line on the chart, it shows price trend retracements in the main trend.

When a major trend line is broken, it gives a signal for probable reversal in the trend.

Let’s take a look at an example.

Below is GBPUSD, Daily chart in uptrend;

As price retraces back to trend line, you await for a bounce.

We have continuously mentioned the importance of candle patterns combination in such instances. It gives stronger signals.

Looking at the chart above,

the buy signals are confirmed by the engulfing candlestick on the trend line.  These confirm the end of the retracement.

The Stop loss is just below the previous low.

 Trend retracements in downtrend.

To identify retracements when in a downtrend, draw your trend line above the price and connect at least three lower highs for a valid trend line.

Since we always aim at trading in the direction of the main trend, sell as price bounces off the trend line.

Take look at the EURJPY, Daily time frame chart below

The sell signals confirmations is the bearish engulfing candles on trend line. 

These confirm the end of the retracement.

The Stop loss is just above the previous high.

 How to use Fibonacci Retracements to identify and trade retracements

Fibonacci retracements can be used to identify the price retracement levels in the Forex market.

Retracements normally occur on the levels of 38.2%, 50%, and 61.8%,  before the continuation of the price trend.

Usually if prices goes beyond 100%, it’s an indication for a probable reversal.

To identify retracements in an uptrend,

Draw the Fibonacci retracement from the previous low and drag to the previous high.

Like we said, we always aim at trading in the direction of the trend.

How to trade trend retracement with a fibonacci Retracement

To trade retracement on the fib level in an uptrend, buy on bounce of a fib support.

Here is an example.

From the above chart, price found support at level 50.0% .

The buy signal confirmation is the hammer candlestick pattern on the level. This confirmed the end of retracement therefore uptrend resumption.

Price then retraced once more up to 0.0% level. The confirmation for another buy signal a circled pin bar/hammer.

As we try to identify retracement levels in the market using Fibonacci retracement, we buy on Fibonacci support when in an uptrend and sell on Fibonacci resistance when in a downtrend.

From the above chart,

50.0% fib support level was a good point to take a buy since we had candlestick reversal patterns on the level.

Using these technical indicators does not guarantee a safe haven rescue from losses. What we should not forget is that with Forex trading anything can happen in the market.

So as you rely on these technical indicators to identify and trade reversals &retracements, develop a habit of using stop losses in your trading strategy to minimize probable losses.