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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Chart Patterns: After the Buy
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Trading Basics: Evolution of a Trader book.
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Swing and Day Trading: Evolution of a Trader book.
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Bulkowski's Retrace Day Trading Setup (long)

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Busted
Patterns
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 10/20/2017
23,329 165.59 0.7%
9,972 85.59 0.9%
749 1.35 0.2%
6,629 23.98 0.4%
2,575 13.11 0.5%
YTD
18.0%
10.3%
13.6%
23.1%
15.0%
Tom's Targets    Overview: 10/16/2017
23,700 or 22,700 by 11/01/2017
10,300 or 9,700 by 11/01/2017
775 or 725 by 11/01/2017
6,700 or 6,500 by 11/01/2017
2,625 or 2,525 by 11/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

My book, Swing and Day TradingSwing and Day Trading: Evolution of a Trader book., shown on the left, has several swing and day trading setups including performance statistics.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

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This trading setup uses the 5-minute (or 1-minute) chart to take advantage of price making a strong move down. You buy the stock after it bottoms and then use a tight stop as price climbs.

 

Retrace Day Trading Setup Background

The idea behind this trade is to find a strong move down, wait for the turn, and then buy the stock to capture a portion of the retrace of the prior move down. You can use this setup on any time scale but you can narrow your potential loss if you use a short time period to exit, like the 1-minute scale.

Retrace Day Trading Setup Methodology

The ideal retrace setup

The figure shows an idealized retrace trade. You can use the 1 or 5-minute scale for this. Price begins trending downward at A with a tall black candle. Candle B has short shadows and the candle opens near where the prior candle closes. Candle C is similar in appearance but that is not important. What is important is that you have at least three consecutive black candles. Many times, more than three candles will form a strong down trend. You do not want to see much overlap between candles and few or no consolidation regions. Those consolidation regions will slow or stop price when it turns.

In this example, candle D ends the downtrend. Candle E forms as a color change (black candle to white). This is the signal candle. It may not mean a trend change but you can use it to prepare. Place an order to buy the stock a penny or two above the high. I show that as point F. Place a stop a penny below the bottom of the candle at E. If the candle is tall then switch to a shorter scale (move from the 5-minute scale to the 1-minute, for example) and place the stop. If no good stop location exists, then place a stop a penny below the mid point of the tall candle's body.

If you are using the 5-minute scale to find the setup then switch to the 1-minute scale as price approaches the target. The ideal target is at least 50% of the prior down move. That is half the move from the swing high at A to the swing low at D. Other retrace values are 38%, 50%, 62% or even more of the AD move. If price approaches the 38% retrace target then switch to the 1-minute scale for the exit.

To exit the trade once price nears the target, place a stop a penny below the prior candle's low. Raise the stop as each new candle appears. In this example, the initial stop is at E then the stop location follows each candle higher as price climbs. At candle H, the stop is a penny below candle G's low. Candle H pierces the stop and takes us out of the trade.

Retrace Day Trading Setup Checklist

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  • Begin with the 5-minute (or 1-minute) chart to identify a strong down trend
  • The ideal trend will have black candles with tall bodies, short shadows, and prices with little or no overlap. This is the AD move in the above figure
  • Look for at least three consecutive black candles
  • When a candle changes color (candle E), from black to white, that is the signal candle. It may mean a trend change
  • Place an order to buy a penny above the signal candle's high (the price at F)
  • When the order fills, place a stop a penny below the signal candle's low (the price at E)
  • Compute the exit (target) price as a 38% or 50% retrace of the prior down move (from swing high to the next swing low, that is, a portion of the AD move in the above figure)
  • As price nears the target, move the stop to a penny below the prior candle's low (a penny below the low price at candle G when H forms, for example)
  • Alternatively, you can place a stop a penny below the prior candle or 2 candles behind as price drops. You need not wait for price to near the target before using the prior candle low as the stop location but you may be stopped out prematurely
  • If a tall candle appears, place a stop one penny below the middle of the body: (open+close)/2 - .01
  • Eventually, price will hit the stop and take you out

Retrace Day Trading Setup Example

An example of the retrace setup

The chart shows an example of the retrace trade. Price drops in a strong trend on the 5-minute chart beginning at candle A and bottoming out at B. A buy order a penny above candle B would get you into the trade during candle D, shown at price C.

Since candle B is so tall, you will want to place a stop closer than a penny below its low. I would split the height in two and place a penny below the mid point. Raise the stop as each new candle appears. Place the stop a penny below the prior candle's low. The trade remains open on this chart because price has not hit the stop yet.

-- Thomas Bulkowski

 

 

 

 

 

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. The control key on the keyboard does not work.