19 March 2020

Forex Trading Retracements vs Bounces

Retracements and bounces are both types of patterns which can be seen when trading Forex. What pattern means in this sense is a trading pattern, a repeated type of formation which can be seen on the chart (vs. a 'geometrical' pattern, like a triangle). A retracement is a move counter to the general direction, which can turn into a reverse of the general direction. Retracements may be seen in patterns such as trends, which have an overall direction and therefore which can have patterns within them against this direction. Thus a retracement can be seen as part and parcel of the way a directional move unfolds in Forex, and is a reason why the Forex market is complex and hard to trade.
Forex can seem a tricky market to trade precisely because when taking a position, the market can then move against the traded position. Does the trader stay in or exit. One way around this is to trade using rules or signals which provide exit, management and entry points. However it can be found that these rules result in decisions to stay when it might have been better to exit (for example when a retracement turns a trend into something else). On the other hand using discretion and exiting despite the rule or signal, may result in a decisions to leave when it would be better stay in the trade. However it is possible to use discretion to generate new situational rules or justifications, which can allow a trader to exit, which is potentially a reason for exercising discretion. This issue can be avoided more or less by using a robot to trade, however the lack of discretion can result in losses rapidly accumulating (even if it works out in the end).
When seen on the chart (i.e. in the past), retracements can seem quite structured, for example occurring in threes in a trend. But in the present this regularity can be hard to see and gauge (i.e. its clarity is a consequence of it having happened, but at the time of formation other events could have occurred). A bounce is another related pattern, as it also results in moves against what has been the general direction. However a bounce can be a temporary move which ends up continuing the current move, but it also can reverse the direction or perhaps more commonly lead into a more horizontal move, perhaps with reduced ranges of movement and decaying volatility. As with all patterns bounces and retracement can seem clear when viewed on the record of past events (the chart) but hard to gauge when viewing the market as it unfolds in the present. There are many possible outcomes at a given moment in Forex, which can change trading patterns into something else. Volatile markets can perhaps be seen amplifying this tendency as well as adding irregular moves into trading regularities.