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Observations on Retracement

Observations on Retracement

Richard Krivo, Trading Instructor

Instructor's Response:

Taking the questions in order...

Oftentimes when a move is very strong, as you suggest, the retracement can be rather short in duration both in time and in the distance retraced.

In this case we are just dealing with the move to the downside. The move preceding it will not come into play relative to the Fib tool.

Not in general but see the answer to the next question.

While there are no hard and fast rules, no absolutes on this type of thing, in a general sense, the more liquid the pair is, the more it will tend to follow technicals. Since there are more traders trading the pair, the more likely the pair will be to follow the "rules" of technical analysis.

So the EURUSD, USDJPY pairs, being the most liquid, will be more prone to following technicals than will an exotic pair that is not as widely traded such as the CHFNOK for example.

Regarding you question on the entry on NZDJPY pair in example #2...

The NZDJPY pair was in an uptrend at the time and taking a long position after a solid retracement would be a higher probability entry.

When the pair "wicked" below the 61.8 level on the retracement, a trader could open a long position at the open of the next candle with a stop below that low wick. Generally we like to see a Fib level tested a few times. Sometimes we have that luxury and sometimes not.

A full retracement to the 61.8 level is a solid retracement and, as such, merits one's attention. Some traders will not enter a trade based on Fibs unless it retraces into "the box"...referring to the area between the 50.0 and the 61.8 levels.

chart 2 11 10 a

chart 2 11 10 b


DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.