Understanding Retracements & Reversals

Trading retracement and reversal are two different concepts. While the former portrays a healthy correction in securities prices, the latter denotes a more significant decrease and shift in mood.

By learning the key differences in the retracements vs. reversals argument, you can hold onto your winning trades longer and cut your losers earlier.

To identify them, the foremost requirement is the trader's ability to determine the trend of a stock, which requires knowledge of fundamental and technical analysis. Retracement indicates a short-term weakness that witnesses are buying momentum at crucial levels called 'supports.'

If you could identify whether this latest move was a retracement, you'd expect the price to soon resume trading in the direction of the trend and be able to hold onto your winning trade for longer.

On the other hand, if you could identify whether this move was a reversal, you may expect the price to continue lower and close out your long trade while still in profit.

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