In forex trading, you may often hear or see terms like reversal and retracement. What exactly are reversals and retracements?
Table of Contents
- Definition of Reversal
- Signs of Reversal
- Definition of Retracement
- Signs of Retracement
- Additional Notes
Definition of Reversal
A reversal is a change of the price trend because it is no longer able to continue the current trend. In other words, it’s a moment that can provide optimal profits in forex trading.
A reversal is a change from a bearish trend to a bullish one or a long-lasting bullish to a bearish trend change. The reversal moment lasts in the long term, it can last several weeks or several months.
A trend can be a reversal if the price breaks towards support. Or resistance and the trend have the same shape as the daily time frame or higher. Usually, before a change or reversal occurs, the market conditions are sideways/consolidating.
Signs of Reversal
In general, there are several examples of recognizable reversal signs:
- The price was unable to break the important resistance level.
- An event has occurred or has been released. A piece of important news that can affect the economy of a country and have a long-term impact.
- Certain candle patterns have a big impact. Like the Morning Star, Evening Star, Three Black Crows, Three Inside Up, Three Inside Down, and others.
- A prominent price pattern is formed, such as Rounding Bottom, Rounding Top, Double Bottom, Double Top, and others.
Definition of Retracement
If in a reversal, the trend reverses direction in the long term, then in a retracement the trend reverses direction in the short term, commonly known as a correction. In other words, a retracement is a price movement that goes against the trend in a short period of time.
Generally, bearish retracement will occur in the middle of a bullish trend and is temporary, while bullish retracement will occur in the middle of a bearish trend which is also temporary. This moment is often used by traders who have a scalping trading style.
Signs of Retracement
In general, there are several examples of recognizable retracement signs:
- Some traders took a profit. However, these traders were just a minority. While the majority of traders maintain their positions because there is no news or events that indicate the trend will reverse direction, the trend will return to its origin when the correction due to profit-taking by some minority traders has been completed.
- The price is approaching a certain psychological level, but that psychological level is not an important resistance level in the long term.
- Does not have a particular form of candle pattern and price pattern. Also often has a light impact candle pattern, such as a Single or Double Candlestick Pattern.
- Does not have the form of a prominent price pattern, as in reversal signs.
Additional Notes
Retracements are easier to detect than reversals. Retracements can be detected using channels or using Fibonacci levels, Pivot Points, or Trendlines found on MetaTrader 4 or MetaTrader 5 platforms.
In addition, for a more accurate analysis, it is also recommended to combine it with common technical indicators, such as the Relative Strength Index (RSI), Stochastic, and the like to confirm emerging retracement signals.
About The Author
