Retracement

Definition

A retracement is a short-term, temporary move in a financial instrument that goes against the prevailing trend. It’s a pause or pullback within an ongoing uptrend or downtrend, after which the original trend typically resumes.

How retracements work

• Retracements are countertrend moves that do not break key trend structure (support in an uptrend or resistance in a downtrend).
• They can last from a few bars to several sessions and vary in depth.
• By themselves they provide limited information; combined with other technical indicators and price action context, they help assess whether the primary trend will continue or weaken.

Retracement vs. Reversal

• Retracement: temporary pullback that respects the trend. Price remains above support in an uptrend (or below resistance in a downtrend) and the trend continues.
• Reversal: a longer-term change in trend direction where price breaks critical support/resistance or violates the trend line, signaling that the prior trend has ended.
• Misidentification risk: small reversals can look like retracements and vice versa. Confirm with trend structure and indicators before acting.

Pullback (common usage)

• A pullback is a brief drop in price during an uptrend (or a brief rise during a downtrend). It is a type of retracement.
• Traders often view pullbacks as potential entry opportunities in the direction of the main trend, provided the trend remains intact.

Technical indicators commonly used with retracements

Use indicators to confirm whether a retracement is likely to end or turn into a reversal:
* Moving averages (trend direction, dynamic support/resistance)
* Fibonacci retracement levels (common pullback targets)
* MACD (momentum shifts)
* RSI (overbought/oversold conditions)
* Volume or accumulation/distribution (strength of the move)

Identifying an uptrend

An uptrend is characterized by:
* Higher highs and higher lows over a period.
* Pullbacks that do not penetrate prior swing lows or key support levels.
* Confirming indicators (rising moving averages, positive momentum).

Practical guidance for traders

• Never rely on a single signal—combine price action, support/resistance, and indicators.
• Define the trend first; trade retracements only when structure and confirmation align with your plan.
• Use stop-losses placed beyond invalidation points (trendline breaches, key support/resistance) to manage risk.
• Consider the depth and duration of the retracement: shallow retracements often indicate strong trends; deep or prolonged pullbacks may precede reversals.

Key takeaways

• A retracement is a temporary move against the main trend, not a change of trend.
• A reversal occurs when price breaks key levels and the trend direction changes.
• Confirm retracements with technical indicators and trend structure before trading them.
• Proper risk management and clear invalidation criteria help distinguish temporary pullbacks from genuine trend reversals.