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[Forex View] Embrace the Retrace
As those who have followed my thinking know, I believe trading is common sense. When you think of trading this way you can make sense of what many take as blind faith and learn how our logic takes advantage of retracements to trade. This is why I say embrace the retrace,
Why Retracements Work
Ask yourself, why do FIBO levels work? Is it because they are magic levels? There is no magic. These levels work because many traders, both technical and other, use retracement levels such as 38.2%, 50%, 61.8% and thus they increase in importance.
FIBO levels give the market reference levels for retracements and can be a self-fulfilling prophecy. This is because many focus on these levels and react once they hold or are broken. However, there is nothing magic about these levels. They only work because many traders and investors use them.
Embrace the Retrace
The reality is that retracements work because trends, no matter what the time frame, need to shake out the weak positions with the trend (i.e. longs or shorts) before resuming momentum for a run at a new high or low. Retracements are thus a necessary evil that tests the resolve of those holding positions with the trend.
Retracements also offer opportunities to trade.
The key reason is that once a retracement runs out of steam, the market has less ability to absorb fresh buying (in case of an uptrend) or selling (in case of a downtrend) after weak longs (or shorts) have been shaken out. This can be applied to any time frame and offers opportunities to trade. This is why I say, Embrace the Retrace, as I illustrate in the following.
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