As of 03/18/2024
  Indus: 38,790 +75.66 +0.2%  
  Trans: 15,418 -81.05 -0.5%  
  Utils: 853 +3.06 +0.4%  
  Nasdaq: 16,103 +130.28 +0.8%  
  S&P 500: 5,149 +32.33 +0.6%  
YTD
 +2.9%  
-3.0%  
-3.2%  
 +7.3%  
 +8.0%  
  Targets    Overview: 03/13/2024  
  Down arrow38,000 or 39,350 by 04/01/2024
  Up arrow16,300 or 15,350 by 04/01/2024
  Up arrow885 or 830 by 04/01/2024
  Down arrow15,200 or 16,600 by 04/01/2024
  Up arrow5,250 or 5,000 by 04/01/2024
As of 03/18/2024
  Indus: 38,790 +75.66 +0.2%  
  Trans: 15,418 -81.05 -0.5%  
  Utils: 853 +3.06 +0.4%  
  Nasdaq: 16,103 +130.28 +0.8%  
  S&P 500: 5,149 +32.33 +0.6%  
YTD
 +2.9%  
-3.0%  
-3.2%  
 +7.3%  
 +8.0%  
  Targets    Overview: 03/13/2024  
  Down arrow38,000 or 39,350 by 04/01/2024
  Up arrow16,300 or 15,350 by 04/01/2024
  Up arrow885 or 830 by 04/01/2024
  Down arrow15,200 or 16,600 by 04/01/2024
  Up arrow5,250 or 5,000 by 04/01/2024

Bulkowski's Retrace Day Trading Setup (long)

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 the above link and then buy the book (or anything) while 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.

Background
Methodology
Checklist
Example
See Also

 

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.

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Retrace Day Trading Setup: Checklist

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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See Also

 

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