How to Calculate Stock Chart Retracements

by Bryan Keythman

A stock chart retracement occurs when a stock declines in price after a previous uptrend or when a stock advances in price after a previous downtrend. You can calculate a stock chart retracement as a percentage of the previous uptrend or downtrend. A stock sometimes retraces to a specific percentage of its previous trend, such as 50 percent, before reversing direction and continuing on its previous trend. Some investors anticipate certain retracement percentages at which a stock will reverse direction, but there is no guarantee that a stock will reverse direction at a specific retracement percentage.

Identify a low price point at the beginning of an advance, or upward trend, on a stock chart. Also identify the high price point at the end of the upward trend before the stock began to retrace. The high point must be to the right of the low point to designate an uptrend because a stock chart’s timeline moves from left to right. For example, assume a stock chart shows that an upward trend began at a low point of $10 and then advanced to a high point of $20.

Subtract the low price point from the high price point to determine the size of the upward trend. In this example, subtract $10 from $20 to get a $10 advance in stock price between the low and high points.

Identify the current price to which the stock has retraced on the stock chart. In this example, assume the stock has retraced to a current price of $15.

Subtract the current price from the uptrend’s high price point to determine the size of the retracement. In this example, subtract $15 from $20 to get $5. This means the stock has retraced, or declined, by $5 after advancing by $10.

Divide the size of the retracement by the size of the uptrend. Multiply your result by 100 to calculate the percentage of the retracement. For example, divide $5 by $10 to get 0.5. Multiply 0.5 by 100 to get a 50 percent retracement. This means the stock has retraced 50 percent of the distance of its previous uptrend.

Identify previous retracements on your stock chart and calculate their percentages to determine potential percentages to which the stock may retrace and then reverse in the future. According to “The Complete Guide to Single Stock Futures,” a stock may repeat similar retracement patterns under similar market conditions. For example, if a stock previously retraced to 33 percent of a previous uptrend and then reversed direction to continue the uptrend, it may retrace to the same percentage and reverse direction again under similar market conditions.

Tip

  • To calculate a retracement after a downtrend, subtract the low point from the high point to determine the size of the downtrend. Subtract the low point from the current price. Then, divide your result by the size of the decline, and multiply this by 100.

References

  • StockCharts.com: Glossary -- R
  • The Complete Trading Course: Price Patterns, Strategies, Setups and Execution Tactics; Corey Rosenbloom
  • Information Graphics: A Comprehensive Illustrated Reference; Robert L. Harris
  • Trading Tools and Tactics: Reading the Mind of the Market; Greg Capra
  • The Complete Guide to Single Stock Futures: What They Are and How to Trade Them; Russell R. Wasendorf, Sr. and Elizabeth Thompson

Photo Credits

  • Comstock/Comstock/Getty Images