Understanding retracements and reversals
While it is true that trading is complicated and there are many risks of losses, it is also true that there are specific measures to avoid them. One way is proper identification of retracements or reversals. This one is very crucial if you want to keep winning your trades. So, what can we do to identify them?
Retracements and reversals
Let us run through some of the critical differences between retracements and reversals.
- Retracements usually occur after massive price movements that follow one direction. Reversal can happen at any moment.
- Reversals are long-term price movements, while a retracement is like a shorter-term version of this retracement. They are temporary.
- Retracements' fundamentals stay constant. Reversal fundamentals can change. This fact triggers their long-term reversal.
Uptrends and downtrends for both
Retracements: During uptrends, there is buying interest, so that the price tends to rally. During downtrends, there is selling interest, so that the price tends to decline.
Reversals: During uptrends, the buying interest is not enough, so that the price tends to decline. During downtrends, the selling interest is not that strong, so that the price tends to increase more.
How can a trader tell if it is just a retracement? You can choose from these three methods in identifying retracements. We have the Fibonacci, pivot points, and trend lines.
One of three: Fibonacci retracement
This method is the most widely used if not widely used. Usually, the price retracements would always be somewhere around 38.2%, 50%, and 61% retracement levels before going through with the overall trend. Going beyond these levels may mean that a reversal is on the move. Although we are only stating tendencies and we are not saying that this is a hundred percent guarantee. Technical analysis is still only an analysis at the end of the day. Almost everything, if not everything, is uncertain and possible in forex trading and markets.
Two of three: pivot points
Pivot point also helps the trader identify reversals. We should check the lower support points when we are in uptrends, namely: S1, S2, and S3. Now, we have to wait for the break.
On the other hand, when we are downtrends, we should check the higher resistance points: R1, R2, and R3. Just like in downtrends, we need to wait for the break.
Why do we need to wait for it to break? The break also means that there is a significant tendency that reversal is about to happen.
Three of three: trend lines
Trend lines can also help in our dilemma because once a significant trend line breaks, there is a big possibility that a reversal is already happening. Combining this method with candlestick chart patterns can help a trader have more profits.
A few points to ponder for fellow traders
These methods are all helpful in identifying
retracements and reversals, but nothing can match determination, practice, and
experience. Combining these three will also help determine which type of
technique and methods suits you as a trader to go home with nothing but a hefty profit.