In almost all uptrends and downtrends after a particular market move, prices retrace a portion of the previous trend before continuing the move in the original direction. Studies show these countertrend moves tend to fall into predictable percentage parameters.

The application best know in this phenomenon is the 50% retracement. For instance, a market is trending higher traveling from the 100 level to the 200 level. Most often, the subsequent reaction retraces half of the previous movement, to about 150, then regains its momentum and moves upward. This market tendency happens frequently and in all degrees of trend, such as, major and secondary. It also occurs in all trading systems including day trading, swing trading and options trading.

There are also minimum and maximum percentage parameters, one-third and two-third retracements, which are useful. Divide the trend into thirds, and site the minimum retracement as approximately 33% and the maximum as 66%. So when the corrections in the market retraces at least a third of its movement, the trader can compute a 33-50% area as a general frame for buying opportunities.



The 66% parameter becomes a critical area in the event the retracement enters that area. For the trend to be maintained, the correction must not go beyond the two-thirds mark. However, this 66% area becomes a relatively low risk buying area in an uptrend and selling area in a downtrend. Retracement beyound 66%, two-thirds, strongly indicates a trend reversal instead of just a retracement.

Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.