As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%	Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%
Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

Bulkowski's Retrace Day Trading Setup (long)

My book, Swing and Day Trading, shown on the left, has several swing and day trading setups including performance statistics.

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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 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.

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Retrace Day Trading Setup: Checklist

• 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

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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See Also

• This is the same trading setup but from the short side.
• These other trading setups may also work for you.
• Fibonacci retraces and extensions, in price and time.
• Setting price targets using Fibonacci.
• Fibonacci extensions. Do they work?
• Retraces, measured moved. Do large or small retraces result in better performance of measured moves?

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