In all of the previous examples of uptrends and downtrends, the reader has no doubt noticed that after a particular market move, prices retrace a portion of the previous trend before resuming the move in the original direction. These countertrend moves tend to fall into certain predictable percentage parameters. The best known application of the phenomenon is the 50% retracement. Let's say, for example, that a market is trending higher and trav­els from the 100 level to the 200 level. Very often, the subsequent reaction retraces about half of the prior move, to about the 150 level, before upward momentum is regained. This is a very well-known market tendency and happens quite frequently. Also, these percentage retracements apply to any degree of trend—major, secondary, and near term.Besides the 50% retracement, there are minimum and max­imum percentage parameters that are also widely recognized—the one-third and the two-thirds retracements. In other words, the price trend can be divided into thirds. Usually, a minimum retracement is about 33% and a maximum about 66%. What this means is that, in a correction of a strong trend, the market usually retraces at least a third of the previous move. This is very useful information for a number of reasons. If a trader is looking for a buying area under the market, he or she can just compute a 33-50% zone on the chart and use that price zone as a general frame of reference for buying opportunities.The maximum retracement parameter is 66%, which becomes an especially critical area. If the prior trend is to be main­tained, the correction must stop at the two-thirds point. This then becomes a relatively low risk buying area in an uptrend or selling area in a downtrend. If prices move beyond the two-thirds point, the odds then favor a trend reversal rather than just a retrace­ment. The move usually then retraces the entire 100% of the prior trend.
You may have noticed that the three percentage retrace­ment parameters we've mentioned so far-50%, 33%, and 66%—are taken right from the original Dow Theory. When we get to the Elliott Wave Theory and Fibonacci ratios, we will see that follow­ers of that approach use percentage retracements of 38% and 62%. I prefer to combine both approaches for a minimum retrace­ment zone of 33-38% and a maximum zone of 62-66%. Some technicians round off these numbers even further to arrive at a 40-60% retracement zone.