A common thought process a lot of traders have when they first see a new price action setup form, is to immediately focus on getting the best entry point for that particular trade. This sounds perfectly understandably but at what cost?
What is a retracement entry
When a price action setup forms, for example a bullish pin bar, rather than place an entry order above the nose of the pin bar, orders can be set within the range of the pin bar. The retracement entry can be set using various methods, some use the Fibonacci retracement levels and place orders at the 61.8% fib. Alternatively, a key level visible within the bar can be used to place an entry.
Why retracement entries are so dangerous
We need to consider what price has to do for us to get entered into a trade, so when a trader places a retracement entry, for it to get filled, price has to move in the reverse direction to where you want it to go.
In my opinion, for any price action setup to be validated, I have to see price break the high, (if we are going long) or low (if we are going short) of the candle. This means we are saying to the market that price has to be going in the desired direction before we get entered into any trade.
Why would we want to get into a trade going the opposite direction?
The main reason traders use the retracement entry technique is because traders want to reduce their stop loss to increase the risk/reward for that particular trade. Sounds like a good idea, right?
Well, yes when it works out it feels great but in my opinion entering trades where the price action candle hasn’t even been validated is crazy!!
Getting too cute with the Forex markets is why traders get their butts kicked, time and time again.
A far better strategy if you are set on trying to reduce your stop loss, is to modify the stop loss placement instead. Placing orders to get filled once the price action setup is validated by price moving in the right direction is much safer.
So where do we put the stop loss?
Trading the Forex using price action is all about reading and interpreting the information printed on the charts. This is not going to be an in depth article discussing stop loss placement but I just want to highlight an example of how we can adjust the stop loss.
We trade only from key levels and the price action setup will therefore have a key level within its range because we only take trades that reject a key level.
We have the option then to use this key level to protect our stop loss.
This is not a set rule and the majority of the time I will place my stop loss on the opposite side of the price action candle range to that of the entry point.
Are they worth the risk?
On the whole, taking retracement entries is an extra risk not worth taking. Too many times have I seen price action setups form and then price continue past them without the setups even being validated. This is where the uninformed traders lose out.