Contents:
- Understanding Retracement in Trading
- The Key Levels of Retracement Trading
- Equivalent Discussion for a Downtrend Power Move
- The Sweet Spot for Trading Retracements
- Practical Application
- Tactical Entry Assessment for URC at 68 Level (Week 4)
- Conclusion
At Micro Stock Trader, we continuously refine our trading strategies to align with sound, proven methodologies. One approach we are incorporating into our toolkit is Oliver Velez’s Retracement Trading Strategy, as outlined in his YouTube presentation, "How To Trade Key Retracement Without Indicators" (Watch here).
Week 4 analysis of Universal Robina Corporation (URC) using the Retracement Trading Strategy, highlighting key trend reversal and trend continuation zones. The stock is currently testing the 0% retracement level at 68, a critical point for potential rebound or further downside continuation.
Understanding Retracement in Trading
A market move that shows a strong burst of momentum often undergoes a natural retracement before resuming its trend. The key to retracement trading is understanding when a pullback presents a viable trading opportunity versus when it signals potential trouble.
According to Oliver Velez, there are two types of strength moves in the market:
Single-bar strength move: A single large power bar showing aggressive movement in price.
Multiple-bar period of strength: A sustained upward or downward trend over several bars.
Both types of moves create key levels that define retracement zones, which traders can use to make informed decisions.
The Key Levels of Retracement Trading
When a stock experiences a significant strength move, it establishes two critical levels:
Top of Strength Move: This is the peak of the power move, marking the 0% retracement level.
Origin of Strength Move: This is where the power move began, marking the 100% retracement level.
The retracement occurs when the price pulls back from the peak of the move. The probability of a rebound to the original strength level depends on how deep the retracement goes. The breakdown of probabilities is as follows:
Retracement to 33% (1/3 of the move):
80% probability of rebounding back to the top of the strength move.
Considered a high-probability trade setup.
Retracement to 50%-66% (midpoint to 2/3 of the move):
50% probability of rebounding back to the top.
The risk increases as price moves deeper into the retracement zone.
Full retracement (back to origin or 100% retracement):
10% probability of rebounding back to the top.
A full retracement indicates potential trend failure.
Equivalent Discussion for a Downtrend Power Move
In the case of a downtrend or downward power move, the retracement process works in reverse. The price experiences a strong decline, and a counter-trend rally or pullback occurs before potentially resuming the downward trend. The probability of resuming the downtrend depends on the retracement depth:
Retracement to 33% (1/3 of the move):
80% probability of price resuming its downward move to the prior low.
Considered a high-probability continuation trade setup.
Retracement to 50%-66% (midpoint to 2/3 of the move):
50% probability of price resuming its downward move.
Increased risk as price moves deeper into the retracement zone, signaling potential trend hesitation.
Full retracement (back to origin or 100% retracement):
10% probability of price resuming the downward move.
A full retracement suggests potential trend reversal or trend failure.
The Sweet Spot for Trading Retracements
The most favorable area for high-probability trades lies in the 25%-45% retracement range. This zone offers 60% to 90% win probabilities, making it the optimal entry area for a retracement trade.
By waiting for a pullback into this sweet spot zone, traders increase their chances of capturing a continuation move back to the highs (in an uptrend) or back to the lows (in a downtrend), while avoiding trades that may result in trend reversals.
Practical Application
Identify a Strong Move: Look for either a single-bar power move or a multi-bar strength move.
Mark Key Levels: Identify the top of the move (0%) and the origin (100%).
Monitor Retracement Levels: Wait for a pullback into the 25%-45% retracement range.
Execute Trades with Confirmation: Use price action signals or volume confirmation before entering a trade.
Set Targets and Stop Losses: Aim for a return to the top (in an uptrend) or to the prior low (in a downtrend) while managing risk accordingly.
Tactical Entry Assessment for URC at 68 Level (Week 4)
Scenario Analysis
Micro Stock Trader is considering a tactical entry at 68 level for 90 URC shares in Week 4. Given the recent downward power move from an origin of 104.40 (October 1, 2024) to a low of 67.80 (January 17, 2024), the retracement strategy suggests that URC is at a critical level where a potential trend reversal may occur.
Rationale for Entering at 68 Using a Stop Limit Order
The rationale for entering at 68 for 90 URC shares is to live test the Stop Limit Order by DragonFi. A Stop Limit Order is a type of order designed to help traders buy breakouts, limit losses, or take profits.
To place a Stop Limit Order, two prices must be specified:
Stop Price: The price at which the order becomes executable. We are setting our Stop Price at 67.80.
Limit Price: The highest price we are willing to pay (if buying) or the lowest price we are willing to accept (if selling). We are setting our Buy Limit Price at 68.
This means our order will only be executed at a price that is at or below the Limit Price of 68, ensuring that we won’t pay more than 68 for the stock. This strategy allows for controlled entry into the trade while minimizing slippage.
Strengths of Entering at 68 Level
Deep retracement suggests discounted entry: A price near the lowest level of the move provides an opportunity for maximum upside potential if a reversal occurs.
Potential breakout from oversold levels: If buying momentum builds up, it could trigger a move towards the trend reversal sweet spot (88.00 - 95.00 range).
Clear stop-loss placement: Entry at 68 allows traders to define a tight stop-loss just below 67.80, minimizing downside risk.
Weaknesses and Risks
Potential continuation of downtrend: The stock may still be in a bearish phase, and a break below 67.80 could signal further downside.
Limited confirmation of trend reversal: The stock has not yet reached the 55%-75% retracement levels where reversals typically gain momentum.
Low probability of immediate rally: At 68, the probability of an immediate move back to 104.40 is low, given that it has yet to break key resistance levels.
Probabilities Based on Strategy
If URC rebounds into the sweet spot (88.00 - 95.00): 60%-90% probability of trend reversal.
If URC fails to reclaim above 75% retracement level (95.30): Potential fake breakout leading to another downtrend leg.
If URC breaks below 67.80: High risk of continued sell-off and new lower low formation.
Overall Assessment
A tactical entry at 68 for 100 URC shares presents a high-risk, high-reward scenario. Given that this level represents an extreme retracement, a trend reversal strategy should be confirmed by price action signals (e.g., bullish engulfing, high buying volume). The safest approach would be:
Partial entry at 68, monitoring price reaction.
Adding more positions near 75% retracement (95.30) if the trend reversal gains traction.
Strict stop-loss below 67.80 to prevent deep losses.
Conclusion
While the retracement trading strategy provides valuable insights, it is crucial to wait for confirmation before committing fully to a reversal trade. A tactical entry at 68 could yield significant rewards if the stock rallies into the trend reversal zone, but risk management is key to prevent substantial losses in case of further declines.
Retracement trading is a powerful tool when used correctly. By focusing on the 25%-45% retracement zone, traders can maximize their win rates while minimizing risks. At Micro Stock Trader, we believe this method provides an effective framework for identifying high-probability trading opportunities without relying on additional indicators.
Disclaimer: This post is for informational purposes only and should not be considered financial advice. Always do your own research before making any trading decisions.
Related Readings
- Micro Stock Trader Portfolio Tracker Page
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