Establishing a Retracement Zone

Look at Chart 16. This is the March 89 Deutschemark contract. The time period is from 4/1/88 to 1/20/89. (The dotted line and crosses are trend and stop signals from the G.E.T. software's "Auto Mode;" they ARE NOT needed to establish a Retracement Zone.)

There are 3 points that will have to be located - PI, P2, and P3.

The first point to locate is PI, a significant high or low from which prices will be moving. On the Deutschemark chart, prices are dropping from such a significant high of 6247 on 4/18, an Intermediate Gann Pivot Point day.

The second point to determine is P2. This is a reaction point from which prices will change direction from the previous trend, and move towards the 50% Retracement Zone. For instance, if prices were falling from PI, they should now be rising from P2, toward the anticipated 50% Retracement Zone. P2 on Chart 16 is the low at 5292 on 8/10 (a Primary Gann Pivot Point day).

The third point to locate is P3. (The coordinates for P3 are described on page 19, of "Definitions.") The two coordinates that locate P3 on Chart 16 are the price of PI, 6247, and the day of P2, 8/10. This point is marked by a "+."

From P2 of 8/10, two lines are drawn up and to the right. LI is drawn at an angle of 63 degrees, and L2 is drawn at an angle of 45 degrees.

From P3, a third line, L3, is drawn down and to the right, and at an angle of 45 degrees.

The two intersections of these three lines - LI, L2, and L3 - will identify the upper (RZH) and lower (RZL) limits of Gann's 50% Retracement Zone:

RZH - LI (upward 63-degree line from P2) crosses L3 (downward 45-degree line from P3).

This is the 63% retracement level, and is 5932 on Chart 16.

RZL - L2 (upward 45-degree line from P2) crosses L3 (downward 45-degree line from P3).

This is the 50% retracement level, and is 5771 on Chart 16.

Two horizontal lines (RZH and RZL) are drawn at the levels of 5932 and 5771, forming a price channel. The resulting 161 -point channel with the limits of 5932 and 5771 is the Retracement Zone, into which you can anticipate prices will enter and react to the downside.

Notice that prices are rising toward the Retracement Zone, but in a choppy pattern. This is due to many "50% retracements" occurring during the bull move from the P2 low of 5292, while heading toward the Retracement Zone objective of 5771 -5932.

Prices close at 5782 on 11/10. The price trend has entered the Retracement Zone on a closing basis. Prices closing in the Retracement Zone is confirmation that a change-in-trend MAY BE DUE, within the Retracement Zone. (Prices could very well continue through the Retracement Zone, but a high probability exists that they will react WITHIN the Retracement Zone.)

When prices close within the Retracement Zone, you should either liquidate your position, or move up your "stops" to protect accumulating profits. But how?

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