Trading Un-squared Areas

The life of a trader is all about capitalizing on the opportunities the market provides.

opportunity for traders

One of these opportunities is trading “un-squared areas”.

You might be wondering: what does a square have in common with trading? The answer is nothing.
Un-squared areas are pieces of price action which have not been retraced on the chart. Or in other words, price has kept moving in one direction without making a pullback or retracement.

Anybody who knows the market and Forex specifically is well aware that everything and anything gets retraced on all time frames. Price is consistently and continuously making retracements on all time frame charts. If we grab a 1 hour chart of the AUDUSD for instance and review which candle has not been retraced, then we can conclude that out of 201 candles visible in the screenshot, only 2-3 candles did NOT have price retrace its candle.

AUDUSD

Obviously un-squared areas are relatively special because they only occur once in a while. That makes this opportunity special.

HOW TO RECOGNIZE IT

Un-squared areas often occur when price is moving fast in one direction. The sheer weight and power of price movement makes it continue without providing a retracement of the immediate closed candle.

This one directional movement is often named “momentum,” “impulse,” or “impulsive.” Even within impulses, price does tend to make a retracement of many candles, but the ones that do NOT have a retracement, can be marked as an un-squared area.

Gaps are technically speaking also un-squared areas if price fails to quickly fill the gap. Those levels then have the same meaning as un-squared areas, although it is possible to view them as stronger levels due to the fact that there is no price action when a gap occurs.

How much of a retracement is needed before a trader considers a candle to have completed a retracement will vary from trader to trader. There is no 100% right or wrong answer.

I myself consider a candle that has retraced to about half way (or more) of the previous candle as fully retraced. In this example, traders can see that many candles get retraced immediately, whereas other candles take a lot longer before they are retraced. Eventually some are not retraced at all (purple lines).

trading unsquared

Candle sticks are not the only ones that get retraced. Swing highs and swing lows are also retraced. And eventually even entire trends get retraced. Because trends take long to build, I would not worry too much about un-squared trends, but un-squared swing highs and swing lows occur regularly. In these cases I consider a swing high, swing low fully retraced if price goes back to at least the 38.2% Fibonacci retracement level. Using the boomerang strategy of the Double Trend Trap method is a great way of capitalizing on that pullback potential, but more on trading details later on.

ENTERING BENEFIT

The fact that most candles are indeed squared up (retraced) already provides a major benefit to all traders: wait for the retracement of the candle before entering
One way of helping you remember this rule is via this simple saying: “let it center before you enter”.

In most cases, using these rules helps with entering at a slightly better spot, but have a back-up plan ready if price fails to retrace.

TRADING UN-SQUARED AREAS

The concept behind trading un-squared areas is the fact that eventually these areas will become retraced. It just takes longer before it happens.

Traders try to capitalize on the un-squared areas by either:

a) Trading it back towards the un-squared area;
b) Or trading it when price is back at the un-squared area;
c) Or using the levels as an extra confluence for their setup, strategy, and analysis.

Point A is often named “fill the gap” by traders. It is very high risk and only intended for the best reversal traders and more aggressive ones. It basically means that traders are trying to trade the currency back towards the un-retraced zone.

unsquared chart

Point B is often named “trading the gap” by traders. This trade setup is the more standard and used variation. This has its risks too, as traders are waiting for the price to turn at the gap. Because price is usually making an opposite momentum to reach the gap, this setup also has its difficulties. But there are methods to increase the odds of success.

One of the ways to increase the odds of a successful entry is waiting for a candle stick pattern to emerge before trading it: engulfing twins at the same level that an un-squared area gets retraced increases the odds of the market using this level as a support or resistance.

The other method is using our Double Trend Trap (DTT) template for recognizing trending environments and pullbacks within those trends. The DTT method will provide excellent guidance when a currency pair is trending and whether the pullback to an un-squared area can expect a bounce. Check out the details here.

trading unsquared chart

Point C is the conservative method of using this strategy. In this case a trader is using the concept as a supportive tool for making trading decisions, just as opportunity, trigger, entry, take profit, and trade management decisions. Using confluence for trading decisions is of immense value to all traders.

Is the first time that you have heard of this concept?

OR is it something that you already know?

Have you tried using it in your own trading?

As always, we are very appreciative of the time you took to read this article. And we equally appreciate the effort for sharing this article with family, friends and business contacts.

Wishing you Happy Trading!

 

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Chris is the head of the mentoring program and trading room at Winner's Edge Trading. He has a passion for technical analysis and helping Forex traders achieve their goals in trading. Chris has been trading for almost 10 years and is most fond of the Double Trend Trap (as a strategy), moving averages (as an indicator) and Fibonacci (as a tool).

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  • Chris

    Any candle that has not been sufficiently retraced is unsquared.
    What is sufficiently retraced? That depends from trader to trader. I use the rule that half of the candle must be retraced.

  • user

    I just finished reading this article, but still don’t understand what the un-squared area means and where to find the Point of A, B or C.