Identifying Retracements
A popular way to identify
retracements is to use Fibonacci levels.
For the most part, price
retracements hang around the 38.2%, 50.0% and 61.8% Fibonacci retracement
levels before continuing the overall trend.
If price goes beyond these levels,
it may signal that a reversal is happening. Notice how we didn’t say will.
As
you may have figured out by now, technical analysis isn’t an exact science,
which means nothing certain… especially in forex markets.
In this case, price took a breather
and rested at the 61.8% Fibonacci retracement level before resuming the
uptrend. After a while, it pulled back again and settled at the 50% retracement
level before heading higher.
Another
way to see if price is staging a reversal is to use pivot points
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How to Identify Reversals
Properly distinguishing between retracements and reversals
can reduce the number of losing trades and even set you up with some winning
trades.
Classifying a price movement as a retracement or a reversal
is very important. It’s up there with paying taxes *cough*.
There are several key differences in distinguishing a temporary
price change retracement from a long-term
trend reversal. Here they are:
Retracements
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Reversals
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Usually occurs after huge price movements.
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Can occur at anytime.
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Short-term, short-lived reversal.
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Long-term price movement
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Fundamentals (i.e., the macroeconomic environment)
don’t change.
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Fundamentals DO change, which is usually the catalyst for the
long-term reversal.
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In an uptrend, buying interest is present, making it likely for
price to rally. In a downtrend, selling interest is present, making it
likely for price to decline.
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In an uptrend, there is very little buying interest forcing the
price to fall lower. In a downtrend, there is very little selling interest
forcing the price to rise further.
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