How Can You Tell the Difference between a Retracement and a Reversal?

The knowledge to predict the difference between a retracement and a reversal is a great tool to add to your trading arsenal.  Many experienced traders are still unable to detect the difference between an assets retracement and a potential reversal. Reversals are temporary changes in a trend that occurs over a short period of time.  Whereas retracements are momentary changes that often occur during a longer trend.  Unlike reversals, retracements show a continuation of an opposing trend within the targeted price action. Being able to successfully determine whether an asset is displaying a reversal or retracement is vital if you want a high success rate trading portfolio.

Let’s say you’ve entered a market and are holding a position. But now the market is moving against you. Is this current move a retracement or a reversal? If it’s a retracement, it is a temporary pullback, where prices will bounce off support and resume the direction of the original trend. Deciding when to close your trade or keep it going is very important if you want to earn more pips but not turn a winning trade into a losing position.

John Roman
John is an active trader and educator at Investors Trading Academy with an MBA in Finance from New York University.  He began trading in 1995 focusing mainly on commodities and options, then transformed into forex investment. His current specialization covers all aspects of forex trading utilizing fundamental and technical analysis, namely chart pattern analysis. Mr. Roman has conducted training seminars on all over the world from novice to innovative strategies.  He provides a solid, collaborative and extremely encouraging training atmosphere to assist Forex traders in locating and trading momentum moves, using confirmed patterns and methods.