If you trade any trend-following technique, you’ve probably wondered if the decline you’re seeing is only a retracement or a complete reversal.
Understanding the critical differences in the retracements vs. reversals debate allows you to keep your winning trades longer and cut your losers earlier.
A retracement is a transient price movement in the opposite direction of the general trend.
Because retracements are only brief, they are short-term, countertrend swings that invariably result in price trading back in the original direction.
When the market’s overall trend switches direction, this is referred to as a reversal.
Reversals are far more dramatic, longer-term changes in a market’s direction, changing from bullish to bearish and vice versa.
If the price has reversed the other way, the market will likely continue forming a new trend.
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