The full 76 retracement strategy.
A trend continuation strategy.
When this strategy works it’s usually working inside an expression of the Elliot wave impulse leg. For trend following the 76 retracement strategy is bread and butter and one of the best things I think a trader can have in their toolkit. It’s a simple strategy that can pick up great trades.
The 76 retrace strategy works on the basic premise that markets will tend to develop trend legs in three main advances and then there will tend to be a large correction of that. In a valid trend, we will not break the previous high or low - but we will quite often retrace about 3/4 of the last move (To the 76 fib).
Basics for why strategy has positive expected edge
The 76 retracement strategy seems to be under-used/discussed in the public sphere but it’s one of the most simple to understand strategies for an expected winning edge. Basic trend following rules state in a trend previous highs in a downtrend will not be broken and previous lows in an uptrend will not be broken.
This works a lot of the time. The most basic of trend structure rules have their caveats and flaws - but you can do some simple checking and find this happens more often than it does not in in a trend. It’s what makes the trend a trend. Trends have to be doing this or they are not trends.
If you’re going to wait until something retraces 75% and then bet it will make a new high before a new low (Up-trending) or a new low before a new high (Down-trending) you have to risk 25% of the swing to gain 75%. You can make three times as much in a win as you can in a loss. A 1:3 RR ratio.
As stated above, trend structure is not perfect but at the very least half of the time the trend has to be acting in a way that would be profitable for this strategy. It’d not be a trend otherwise. If you can win half of your trades, winning $3 when you win and losing $1 when you lose - this is a no brainer bet.
More technical theory for strategy
Using the Elliot model what this is essentially looking to do is catch the end of the “C” correction and enter into the start of the new impulse wave. Big ABC corrections usually head to the 76 fib. This is true of intraday trends on small charts and of major market crashes.
By entering into start of wave 1 of a new trend cycle we are entering at what will prove to be optimal price is the trend continues. The Elliot rules are invalidated on the breaking of the previous high/low which is where the strategy stop loss on this is. With experience of Elliot you can expand the RR potential of this trade to 1:8 RR.
Things you should expect to see before this trade
Before this trade you will usually see extremely strong price moves. In an up-trend the market will be falling very hard and fast and the inverse in an up-trend. When on big chart we’ll often see news during this part of the move and this is why price is moving so fast.
To fade momentum (Bet on a reversal) into the move you’re seeing should be counterintuitive. It should look and feel like the market will continue in the direction it is going. Then it should slow down a bit. Make some spikes. Overall range for a while. Make a few bluffs as if it’s going further, and then start to reverse.
Big 76 retrace trades are impossible to miss if you are ready to look for them, and if you’re not the area in which they set up is one of the areas you’re most likely to lose trades. Something traders can test. Check for recent times when you’re bought a high or sold a low and see if that happened to be on a 76 fib.
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