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Swing Trading Technique Using 50% Retracement to Harvest Profits

As a swing trader, leveraging a 50% price pullback can be an effective strategy for reaping profits. But how to do it? Let's delve into the following guide.

Swing trading is a trading strategy focused on medium to long-term profitability. In swing trading, traders seek opportunities to buy and sell when prices experience a pullback before continuing the main trend. The goal of this strategy is to profit from price movements over a considerable period.

In an uptrend, prices tend to form "higher highs" and "higher lows," while in a downtrend, prices form "lower lows" and "lower highs."

In the 50% retracement technique, traders look for entry opportunities when prices pull back around 50% from the previous price movement.

In this article, we will further discuss swing trading techniques using the 50% retracement and provide practical guidance on identifying entry opportunities at Fibonacci levels. By understanding this technique, traders are expected to enhance their profitability in forex trading.

What is Retracement?

Retracement in trading context refers to the temporary correction or reversal of prices from the main trend or previous price movement. Retracement can occur in both uptrends and downtrends. Retracement is often seen as an opportunity for traders to buy or sell at better prices, especially if prices have reached strong support or resistance levels. Fibonacci retracement is commonly used by traders to identify potential price levels where retracement may occur.

How Deep is the Retracement?

Determining how deep the pullback is a difficult question to answer as it depends on market conditions. One method used by traders is to use moving average indicators or Fibonacci levels from the previous swing high and swing low. The 50% retracement has become one of the reliable methods in swing trading techniques.

How to Add Fibonacci Retracement to MT4

To add Fibonacci Retracement to MT4, follow these steps:

  1. Open the price chart you want to analyze in MT4.
  2. Click "insert" on the top panel, then select "fibonacci," then select retracement.
  3. Select swing high and swing low on the chart you want to analyze by drawing a horizontal line from swing high to swing low or vice versa.
  4. After determining the swing high and swing low points, MT4 will automatically display Fibonacci retracement levels on the price chart.
  5. You can click and drag these levels to adjust the levels you want to use.

Buy and Sell Setup

For a buy setup, look for bullish price movements that surpass the previous swing high with strong momentum. Mark the "retracement zone" between 50% and 61.8% of that price movement. After the price drops into the retracement zone, buy above any bullish candlestick formed.
For a sell setup, look for bearish price movements that fall below the previous swing low with strong momentum. Mark the "retracement zone" between 50% and 61.8% of that price movement. After the price rises into the retracement zone, sell below any bearish candlestick formed.

Determining Stop Loss and Take Profit

Stop loss in swing trading technique utilizing 50% retracement is placed below the last lowest price if the position is buy or above the last highest price if the position is sell. Take profit can be determined by looking at risk/reward ratios above 1/2 or 1/3, or at the next support/resistance level.

Risk Management

Risk management is crucial in trading. The risk per transaction should not exceed 2% of the trading capital. This way, losses are controlled and do not exceed the set risk.

Profit and Loss Trading Examples

For example, on the chart of Tenet Healthcare Corp (THC on NYSE), a strong upward swing was formed after a long decline. Four consecutive bullish candlesticks rose above the last swing high with strong momentum, giving a strong buy signal. On the other hand, on the chart of Pepco Holding (POM on NYSE), the price moved bearishly but the retracement failed to hold the price and turned into a strong support zone.

Advantages and Disadvantages

The advantage of this technique is it's easier to determine stop loss and target profit levels, more flexible, and suitable for traders who have other commitments outside of trading. However, there are also disadvantages, such as not all retracements will result in good trading opportunities, the risk of incorrectly determining retracement levels, and sensitivity to fundamental factors or economic news.

Swing trading technique using 50% retracement is one of the popular trading strategies. However, before using it, traders need to understand that not all retracements will yield good trading opportunities. Risk management is also crucial in this technique. By understanding and applying this technique properly, it is hoped to help traders consistently achieve their financial goals in the long run.


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