50% level is a simple technique that can be used by any beginner trader. At the same time, it is very effective – the professionals’ experience can confirm this.
By using 50% levels, traders can find entry and exit points to improve the accuracy of trading decisions and reduce risks.
In this article, we have collected comprehensive information about the 50% level:
Let’s suppose that some factors made the price rise from 100 to 110 dollars, for example, it happened due to a release of positive reporting. This is an impulsive move.
The 50% retracement is a subsequent price decline to $105 from a $110 peak. That is half the impulse. A trend is likely to resume after the 50% retracement.
Usually it works like this:
This phenomenon was discovered more than 100 years ago. No wonder that the 50% level of the impulse is described as a very important thing in numerous books on technical analysis for beginner traders.
The principle is simple (see figure below):
It is done in anticipation of an impulse (trend) resumption after a break.
There is plenty of evidence on any chart that the 50% retracement is very effective: from minute to weekly, from stock to cryptocurrency.
But why does this level work? What is the internal reason that explains the reversal which sometimes occurs with the pinpoint accuracy?
We do not claim to be the ultimate truth, we will only present three hypotheses. Which one is the most plausible is up to the reader. After all, every trader is responsible for their own actions.
The 50% level works because it is a Fibonacci level. The Fibonacci numbers describe proportions that are found everywhere.
A situation that occurs on the exchange is similar to a typical bargaining between two people:
— I’ll buy your car for 20 thousand.
— I will sell for 30 thousand.
— Well, what about 25? Let’s meet halfway.
— Okay, deal.
If the seller is confident in the quality of the product and the demand for it, he is unlikely to lower the price below 25. Or below 26. Or he will not make any concessions at all. This can explain retracements which are less than 50% and typical for strong trending markets.
Let’s imagine that the market is a universal mechanism which is designed to “take money in a relatively honest way” from a large number of emotional private investors who dream about getting rich quickly and without any effort.
Then the motivation for the price movement is to cause losses to as many similar market participants as possible:
Therefore, 50% is a kind of balance that prevents those who trade with the trend and those who trade with the retracement from making a profit.
Using professional instruments of the ATAS platform, let’s analyze some examples from different markets to identify:
We are going to use the Fibonacci levels drawing object. Use the hot key F8 to call it.
The hourly chart below (August-September 2022) shows:
Let’s say you notice a bearish impulse on day A. On day B, you mark off the 50% level of the impulse to wait for a retracement to the 50% level and enter a short position.
To make it more convenient, you can set an alert for the created level so that you do not miss the moment when the price approaches the level. This feature of the ATAS platform saves traders time and effort by allowing them to track price movements on multiple charts at the same time.
To set an alert:
You can learn more about alert settings in the Knowledge Base or by contacting the support.
Let’s imagine that today is the beginning of day B and we want to sell from around 4020 level.
Let’s switch the chart to Range X mode – ES futures have very different volatility during the day, but range charts smooth it out. We will also add the Dynamic Channel and the Delta to the chart.
The chart above shows the first of two bullish retracements to the 4020 level which is the 50% level of the bearish impulse from the previous day.
The price dynamics forms an ABCD pattern of falling highs and lows, which might be a sign of weakening demand as the price approaches the 50% level. The weakening is also indicated by the fact that the candles are formed not above the channel (as it happens on the left side of the chart), but inside it.
There are two setups for entering the short position (marked with black arrows):
The chart below shows a moment when the price approaches the 4020 level for the second time:
There are three setups for entering a short position from the 50% level on a higher time frame:
For competent risk and capital management, we suggest thinking about an idea of setting stop-losses based on the setup on the lower time frame and take-profits based on the perspective on the higher one.
The Short Position drawing object will help you evaluate the ratio of a relative risk to a potential reward (R:R). If the stop-loss is placed above the dynamic channel on the lower time frame, and the take-profit is placed on the update of the impulse’s low, then the ratio will be more than 4:1.
The R:R ratio can be improved if you find a take-profit level in anticipation of an even more powerful trend resumption.
You can use alternative options or activate protective money management strategies built into the ATAS platform.
The main thing is not to let the losses grow if you do not see a trend resumption after the 50% retracement of the impulse move.
Let’s have a look at a setup for entering a long position on day D and use the same chart settings for the lower time frame.
Knowing about a strong rally on the previous day C, we can expect a 50% retracement to go long when the appropriate signals are received.
The chart provides two such signals (marked with black arrows):
There have been several disappointing price drops in the cryptocurrency markets in 2022. In particular, the June decline of A → B when the cost of bitcoin fell sharply below 20 thousand dollars per coin.
We can assume that this fall caused a lot of panic. Traders were actively entering short positions, the news was bad, and even long-term holders were getting rid of bitcoins.
When the panic selling climax was over, the price began to gradually increase towards the 50% level of the A→B impulse (around $25k area).
As the price approached 25k, the long upper shadows on daily candles signaled sellers’ activity.
Let’s switch to the 4-hour time frame to find confirmation of a bearish reversal:
In this case, the formation of a reversal from the 50% retracement level took several days. The TPO and Profile drawing object has been added to the chart, it covers events preceding the reversal.
The black arrows show:
Try using the following logic:
ATAS will help you with this. Download a demo version – there are four good reasons for that:
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Information in this article cannot be perceived as a call for investing or buying/selling of any asset on the exchange. All situations, discussed in the article, are provided with the purpose of getting acquainted with the functionality and advantages of the ATAS platform.
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