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?
Retracement or Reversal?
Have you ever been in this situation before?
It looks as though price action may be rallying and a buy trade is in order.
You've been hit by the "Smooth Retracement!"
Nobody likes to be hit the "Smooth Retracement" but, sadly, it does happen.
In the above example, the trader failed to recognize the difference between a retracement and a reversal. Instead of being patient and riding the overall downtrend, the trader believed that a reversal was in motion and set a long entry. Whoops, there goes his money!
Check out how Happy Pip got fooled by the "Smooth Retracement" in one of her AUD/USD trades.
In this lesson, you will learn the characteristics of retracements and reversals, how to recognize them, and how to protect yourself from false signals.
What are Retracements?
A retracement is defined as a temporary price movement against the established trend. Another way to look at it is an area of price movement that moves against the trend but returns to continue the trend.
Easy enough? Let's move on...
What are Reversals?
Reversals are defined as a change in the overall trend of price. When an uptrend switches to a downtrend, a reversal occurs. When a downtrend switches to an uptrend, a reversal also occurs. Using the same example as above, here's how a reversal looks like.
What Should You Do?
When faced with a possible retracement or reversal, you have three options:
- If in a position, you could hold onto your position. This could lead to losses if the retracement turns out to be a longer term reversal.
- You could close your position and re-enter if the price starts moving with the overall trend again. Of course there could be a missed trade opportunity if price sharply moves on one-direction. Money is also wasted on spreads if you decide to re-enter.
- You could close permanently. This could result in a loss (if price went against you) or a huge profit (if you closed at a top or bottom) depending on the structure of your trade and what happens after.
Because reversals can happen at any time, choosing the best option isn't always easy. This is why using trailing stop loss points can be a great risk management technique when trading with the trend. You can employ it to protect your profits and make sure that you will always walk away with some pips in the event that a long-term reversal happens.
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