How do you know how far the market will go for a pullback or retracement?
Answer from Professor Cornelius Ward:
Unfortunately there is no "cookie cutter" method for identifying this; and if you want to be a pro at anything, it takes dedication to the craft. Below is a small list of options (of course there are more), you should learn and master. If you do, I promise you'll be there sooner than you think (no cliché).
(1) Fibonacci Retracement Tool. Pivot to pivot, more turns occur within the range of the 50% mark than at any other point. Learning to use this tool and measure price action (pivot to pivot) and identifying the 50% mark is probably the simplest method for a novice trader to gauge turns (pullbacks and/or retracements) in trend.
(2) Support and Resistance. This is the most widely used strategy in trading that can help you understand pauses or reversals in trend. Support occurs when a down trend is paused, due to a concentrated number of buy transactions within a small price range, which then causes a reversal and rise in price action. Resistance occurs when an up trend is paused, due to a concentrated number of sell transactions within a small price range, which then causes a reversal and drop in price action. Support and Resistance can be identified, on a chart, as consecutive pivots within the same price range.
(3) Supply and Demand. This has to be the second most widely used strategy in trading. Yet, it's the most used and most ancient business practice—investing (buying) when the majority does not see its future value (demand) and selling after the majority finally realizes its value (supply). Unlike Support and Resistance (which is at the pivot), confirmation of Supply and Demand happens before and after the pivot.
(4) Fading. Many novices learn this technique fairly quickly as well. It's the idea of shorting an instrument, after a rapid spike (like a news event), because many who bought early are most likely ready to exit their positions.
No strategy in trading is fail proof, but learning to invest about 2 hours a day of your personal time to master them will prove to be one of the most rewarding disciplines you've ever chosen to endure.