Pullback Depth Statistics: How Far Do Retracements Usually Go?

[Fairman]

Pullback Depth Statistics: How Far Do Retracements Usually Go?

Pullback entries depend on judgments about how far a retracement will go before the trend resumes. Measuring it removes some guesswork.

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Take a series of trends on your chart and measure the pullback after each impulse as a percentage of the impulse. Collect at least thirty cases. You may find that many shallow pullbacks retrace about 30 to 50 percent, and a smaller group goes deeper.

Common retracement levels, 38.2, 50, and 61.8 percent, are widely watched, but the actual distribution on a given pair and timeframe may differ. Measuring it gives data for your own market.

Several insights can emerge. If most pullbacks stop before 50 percent, waiting for 61.8 percent will often mean missing trades. If many pullbacks go deeper than 61.8 percent, tight stops beyond the 50 percent level will be hit frequently.

Depth also provides information about trend strength. Shallow pullbacks suggest strong momentum, and deeper ones suggest weakening. A pullback that exceeds roughly 100 percent of the prior impulse is no longer a pullback, but a reversal.

Use the findings to place entries and stops. For instance, if 80 percent of pullbacks end within 50 percent, you might enter near the 40 to 50 percent area with a stop beyond the 62 percent level.

Practical step: measure the retracement percentage after twenty impulses on your chart, and compute the median.

[Fairman]

Measuring your own pair is the key bit. Textbook fib levels are a starting point, but some pairs and timeframes pull back shallower or deeper as a habit. A simple way to collect the data is to mark the last thirty or forty clear impulses on your 1 hour chart and note the pullback depth for each as a percentage. Put them in a column and sort it. You'll quickly see where most of them cluster. On some pairs that might be 35 to 50 percent, on others deeper. Then set your entry zone around the common depth and your stop beyond the depth that most valid pullbacks didn't exceed. It's tedious once, then useful for months.

[Fairman]

Using the median instead of the average is a nice touch. One or two very deep pullbacks can drag the average down and make you wait for entries that rarely come. It's also worth splitting the sample by trend strength. Pullbacks in a strong trend, where the impulse broke a clear level with big candles, are often shallower than pullbacks in a slow grinding trend. If you only use one number for both, you'll miss entries in strong trends and enter too early in weak ones. Two medians, one for each type, are usually enough to improve the entries without overcomplicating the plan.