As of 10/20/2020
  Indus: 28,309 +113.37 +0.4%  
  Trans: 11,860 +152.21 +1.3%  
  Utils: 881 +3.55 +0.4%  
  Nasdaq: 11,516 +37.61 +0.3%  
  S&P 500: 3,443 +16.20 +0.5%  
YTD
-0.8%  
 +8.8%  
 +0.2%  
 +28.4%  
 +6.6%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 10/19/20
As of 10/20/2020
  Indus: 28,309 +113.37 +0.4%  
  Trans: 11,860 +152.21 +1.3%  
  Utils: 881 +3.55 +0.4%  
  Nasdaq: 11,516 +37.61 +0.3%  
  S&P 500: 3,443 +16.20 +0.5%  
YTD
-0.8%  
 +8.8%  
 +0.2%  
 +28.4%  
 +6.6%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 10/19/20

Bulkowski's Retrace Day Trading Setup (short)

 

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

$ $ $

This trading setup uses the 5-minute chart to take advantage of price making a strong move up. You short the stock after it peaks then use a tight stop as price descends.

Background
Methodology
Checklist
Example
See Also

 

Retrace Day Trading Setup: Background

The idea behind this trade is to find a strong move up, wait for the turn, and then short the stock to capture a portion of the retrace of the prior up move. 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 upward at A with a tall white 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 white candles. Many times, more than three candles will form a strong up 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 uptrend. Candle E forms as a color change. This is the signal candle. It may not mean a trend change but you can use it to prepare. Place an order to short the stock a penny or two below the low. I show that as point F. Place a stop a penny above the top 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 above 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 up move. That is half the move from the swing low at A to the swing high 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 above the prior candle's high. Lower the stop as each new candle appears. In this example, the initial stop is at E then the stop location follows each candle lower as price descends. At candle H, the stop is a penny above the prior candle's high at G. Candle H pierces the stop and takes us out of the trade.

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Retrace Day Trading Setup: Checklist

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Retrace Day Trading Setup: Example

An example of the retrace setup

The chart shows an example of the retrace trade. Price climbs in a strong trend on the 5-minute chart beginning at candle A and topping out at B. Candle B becomes the signal candle, the first indication that the trend might change. The candle is red while the others to this point have been green. Place an order to short the stock at C, a penny below the candle's low.

The next candle gets you into the trade at 42.35. Place a stop above the candle's high, or 42.49. The target would be half the move from A to B (40.45 + 42.48)/2, or 41.47. A closer target would use 38% of the distance down from the high, or 41.71.

As price nears the 41.71 target, move the stop to a penny above the prior candle's high. On this 5-minute chart, that would take you out at 41.67 (on candle E), slightly below the 41.71 target but still above the 41.47 target.

 

 

 

 

An example of the retrace setup on the 1 minute scale

If you had switched to the 1-minute chart as price neared the 41.71 target (using any candle on or after 10:56 and a starting high price of 42.01), a stop would have taken you out at 41.58. This corresponds to using a penny above the high of candle A (at 10:56) and lowering the stop to a penny above the prior candle high as price descends. Candle B (at 11:07) would stop you out.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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