What Is Retrograde Analysis?
Retrograde analysis is a problem-solving technique that works by starting from a known outcome or goal and tracing backward to understand how that result was achieved.
While it’s commonly associated with chess, where players analyse how a position was reached and how to move backward to discover the sequence of moves leading up to it, the concept can be used in other areas like logic puzzles, planning, and importantly for us, trading.
How to Use Retrograde Analysis in Trading
In trading, retrograde analysis means starting from the final outcome of a trade, whether it was a win or a loss, and working backward to understand the decisions that led to that result.
Imagine you have a trade entry and the trade failed. Instead of simply abandoning the analysis, you retrace the steps to identify what went wrong and what could have been done differently at the entry.
You can ask yourself:
- Where did the price reverse or break out?
- What could have been done differently?
- Where should the stop loss have been placed?
By reversing the steps, you can identify what you missed and how to improve in the future. For example, if you were using a trend line, start with the point of reversal and move the trend line until the kissing points align.
A single trade may not tell you much. But if you go through this process time and again, you’ll start to see common patterns in your trading which you can later apply to your live trading.
You can also apply it to profitable trades and see if there were decisions that could have been made to improve the trade. And you can apply it to trades you missed!
Another approach for retrograde analysis is to find the top or bottom of a wave, and work backwards to discover what may have caused that reversal. This will help you learn how to draw tools accurately and what signs to look for in a reversal. It can even help you form entry criteria for accurately anticipating market reversals.
Why Use Retrograde Analysis?
This approach does two things:
- It improves your learning: By tracking trades and identifying what could have been done differently, you’ll spot common mistakes and make adjustments that improve your future trading decisions.
- It refines your technical analysis: Whether you’re plotting trend lines or using Fibonacci ranges, you’re working backward from key points which will help you anticipate future price movements. You’ll learn how to anchor your levels.
However, for this to actually be useful you’ll need to dedicate some time to it and go over things over and over again, making sure to track your decisions in a journal for review later on.
This is possibly one of the most important techniques to learning technical analysis. You’re essentially reverse engineering your trades to find consistent approaches that you can use in the future.