Preschool>= Lesson Status ?
Kindergarten>= Lesson Status ?
Elementary>= Lesson Status ?
Grade 1 Support and Resistance Levels
Grade 2 Japanese Candlesticks
Grade 3 Fibonacci
Grade 4 Moving Averages
Grade 5 Common Chart Indicators
Middle School>= Lesson Status ?
Grade 7 Important Chart Patterns
Grade 8 Pivot Points
Summer School>= Lesson Status ?
High School>= Lesson Status ?
Grade 9 Trading Divergences
Grade 10 Market Environment
Grade 11 Trading Breakouts and Fakeouts
Grade 12 Fundamental Analysis
Grade 13 Currency Crosses
- What is a Currency Cross Pair?
- Crosses Present More Trading Opportunities
- Cleaner Trends and Ranges
- Taking Advantage of Interest Rate Differential
- Obscure Crosses
- Planning Around News and Fundamentals
- Creating Synthetic Pairs
- Euro and Yen Crosses
- How to Use Crosses to Trade the Majors
- How Cross Currency Pairs Affect Dollar Pairs
- Summary: Currency Crosses
Grade 14 Multiple Time Frame Analysis
Undergraduate>= Lesson Status ?
- Why Keep a Trade Journal?
- Benefits of Keeping a Journal
- What Should You Record in Your Journal?
- Potential Trading Area
- Entry Trigger
- Position Sizing
- Trade Management Rules
- Trade Retrospective
- Trading Journal Statistics
- Reviewing Your Trading Journal
- Difficulties of Keeping a Trade Journal
- Summary: Keeping a Trade Journal
Graduation>= Lesson Status ?
- Which Trading Style is Best for You?
- Which Currencies Should You Trade?
- What is Your Level of Trading Experience?
- Should You Be a Discretionary, Mechanical, or Hybrid Trader?
- What Kind of Mechanical System Suits Your Personality?
- What is Your Attitude Towards Risk?
- What Kind of Stop Suits Your Trading Style?
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:
|Usually occurs after huge price movements.||Can occur at anytime.|
|Short-term, short-lived reversal.||Long-term price movement|
|Fundamentals (i.e., the macroeconomic environment) don't change.||Fundamentals DO change, which is usually the catalyst for the long-term reversal.|
|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.||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.|
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.
In an uptrend, traders will look at the lower support points (S1, S2, S3) and wait for it to break. In a downtrend, traders will look at the higher resistance points (R1, R2, R3) and wait for it to break.
If broken, a reversal could be in the making! For more information or another refresher, check out the Pivot Points Lesson!
The last method is to use trend lines. When a major trend line is broken, a reversal may be in effect.
By using this technical tool in conjunction with candlestick chart patterns discussed earlier, a trader may be able to get a high probability of a reversal.
While these methods can identify reversals, they aren't the only way. At the end of the day, nothing can substitute for practice and experience.
With enough screen time, you can find a method that suits your trading personality in identifying retracements and reversals.
While you are logged into your account,
you can save your progress in the School of Pipsology!
- What is a Trending Market?
- What is a Ranging Market?
- Retracement or Reversal?
- Identifying Reversals
- Protect Yo Self From Reversals