Question:
I’ve noticed that on occasion you will not
enter a market until after it has retraced to the 62% or the 38%
retracement levels. I was wondering if this method was one that has a good
track record?
Answer:
You can use retracement levels to trade
from with the same reliability as using the resistance formed by price
levels, as they are just another form of resistance. Many times the market
will range between retracement levels (ie. between the 50% and 62%) in
which case you could use these levels to bracket the market and trade it as
a breakout from a channel when the market finally commits to a direction.
Many times when you calculate a market's
retracement levels you will notice that the market has already hit these
"imaginary" lines several times. To me, these hits help to reinforce the
validity of the retracements I have calculated and give me confidence to
trade from them.
It can be a valid trade to take a position
above/below the 62% (or 38%) retracement level; however I would avoid
trading this strategy off of the 50% retracement (especially on the
market's first approach to the 50%) as this retracement level tends to be a
little more unpredictable, even if the market manages to exceed the
retracement line it might whipsaw and head the other direction. In this
case it is wiser to wait for a strong close above/below the 50% level to
make sure that the market has committed to a direction and is not merely
chopping around.
-Erich
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Entering a Market on Retracements
