Foreign exchange knowledge popular science: What does foreign exchange retracement mean?

The foreign exchange withdrawal is usually referred to asForex PlatformPercentage retracement is a term that foreign exchange traders often hear when speculating in foreign exchange. Just enterforeign exchange marketAfter a while, you will start to hear the word "retracement" frequently. But for many foreign exchange investors, especially newbies, the meaning of foreign exchange retracement is not particularly understood. So, what exactly is a retracement and why does everyone talk about it? Why is a retracement so important and how can foreign exchange traders make better use of it? Let's learn together today.

What is a retracement?

In simple terms, a retracement is a period in the market where the price returns to its previous state, which may rise or fall. Just as we can walk forward or return to the original direction. A retracement is also a phenomenon of price reversal. For the K-line chart, the price falling from a high point to a low point is also called a retracement. For the funds in the account, a retracement is a decrease in the funds in the account within a certain period of time, usually on an annual or quarterly basis.

For example, when the foreign exchange market rises in a strong trend, it rises from the 100 level to the 200 level, and the subsequent correction is often a correction to half of that movement, around the 150 level.

So, why is it a FX percentage retracement? In fact, FX price trends can generally be divided into three equal parts. Usually the smallest retracement is around 33%, and the largest retracement is around 66%. During a strong trend correction, the market usually returns to one-third of its original movement. Two-thirds of the retracements are particularly critical areas. If the price correction exceeds this level, then a general trend reversal is possible.

In the process of foreign exchange retracement, there are several points that are very important, namely 33% and 37.5%, 62.5% and 67%. These three percentage levels of foreign exchange retracement are what investors must know more about. They are usually also called chopstick lines, which means that when the foreign exchange price retracement touches this price level, it will be caught by the "chopsticks" and cannot move. They are the two positions where the effect is more significant. They are also the two most important proportions in our analysis of foreign exchange structure using percentage lines.

What is the withdrawal of account funds?

The indicator we measure the withdrawal of account funds is the withdrawal rate. The withdrawal rate is also (highest value - lowest value)/highest value. Generally, the initial capital * withdrawal rate of the account is used to measure the loss. In fact, the withdrawal rate can be understood as the loss rate over a period of time. For example, if the account originally had $1,000 and the withdrawal rate was 10%, it means that the loss was $100 during this period.

We often say that it is recommended that investors invest no more than 2% of their account capital in each transaction, meaning that the maximum risk we can take is a 2% retracement rate.

Because there may be multiple fund withdrawals in a period of time. At this time, the maximum fund withdrawal rate will be mentioned. The maximum fund withdrawal rate refers to the most serious period of capital withdrawal in a period of time. The corresponding is the risk that the account has to bear in the worst case.

Using the maximum retraction rate to measure an account's risk management ability is inevitably unfair, because the investment market can encounter surprises at any time. So you can use the average retracement to measure your risk management during this period in monthly, quarterly or annual reviews. The average retracement rate is also calculated in a simple way, which is the average retracement over a period of time. (Note that the maximum and minimum values with very large gaps are mentioned)

Here's an example.

For example, you originally had $1,000 in initial funds in your account, but within a week you lost so much that you almost had $100 left in your account. After that, you deposited a total of $3,500 in your account. Now you have gained experience and invested a lot more cautiously, but these funds still did not last for a month, and the account funds have fallen back to $200. You are no longer investing this month.

In this case, there are 2 withdrawals of account funds. The first withdrawal is from $1000 to $100, and the withdrawal rate is (1000-100)/1000 = 90%. The second withdrawal is from $3500 to $200, and the withdrawal rate is 94%. Your maximum withdrawal rate for this month is 94%. The average withdrawal rate for this month is 92%.

The retracement rate in the above case is too high, unless it is a local tyrant. What if the retracement rate is very high?

A high retracement rate doesn't actually mean that the person's trading ability is not good. It also depends on how long the retracement rate is. For example, if you lose $1,000, the retracement rate is the same, some people only use 1 week, while others use 1 year. So when looking at the retracement rate, you should also consider the length of the time period. The best retracement is to control your retracement rate to no more than 2% regardless of whether it is short or long.