Retracements

Measure retracements in percentage terms. Market corrections up or down often retrace a significant portion of the previous trend. One can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. Therefore popular buy points in an uptrend are usually between 33-38% retracement of the original trend.

As can be seen from the chart below, when joining the trough at 1.2750 to the peak at 1.2890 in the 1-hour EUR/USD chart we can see the Fibonacci levels drawn out. The first retracement ended at the 38% line and the major retracement at the 62% line.