How is Retracement determined?

FX Retracement Radar is the 2^nd product from the FX Radar Series. The idea of FX Radar Series came about from the numerous requests by traders (both professionals and retail traders) to create an indicator which allows them to monitor multiple pairs in multiple timeframe. We have combined the essences of their systems and through our own research and optimization, come up with FX Retracement Radar.

Below are the main concepts behind FX Retracement Radar:

1. Trends

A retracement trade is only profitable when price continues trending. Moving averages are applied to higher timeframe data to determine if there is a trend.

As moving averages are lagging price indicators (Indicators that produce signals after the price events have occurred). We have modified traditionally used moving averages method and came up with our own adaptive version of it to increase the response of moving averages to predict trends.

2. Price Recovery

Most novice traders doing retracement trades will enter into a trade whenever price reaches a prefixed level (e.g. Fibonacci level, Support/Resistance level etc). They do not realize the danger of going against the current price move and are predicting that price will reverse at the exact price level they entered. More often than not, it turns out to be a trend reversal and they get stopped out of the trade.

FX Retracement Radar guards against this scenario and only enter when price resume movement in the original trend direction. To prevent entering late into a trade, adaptive moving averages are again used to increase the response of detecting changes in price direction.

For the chart below, we can see that the signal arrives 1) after price resumed its downtrend and yet 2) the signal came fast (only 2 bars after price completed its upward retracement).

3. Price Momentum

We do not want to get into a trade where the momentum of the move is waning. That is a low probability trade. FX Retracement Radar checks on the current price movement and also on the strength of the overall trend to differentiate between strong trending pairs with increasing price momentum from weak trending pairs which are losing price momentum.

The 1st figure below shows a strong trending pair with increasing upward price momentum which produces a STRONG BUY signal.

The 2nd figure below shows a weak trending pair with decreasing price momentum which produces a WEAK BUY signal. Entering into this trade will still be profitable but the profit potential is smaller compared to a STRONG BUY signal.