Retracement and reversal are two diverse aspects of trading. While the former depicts the occasional correction in prices considered healthy, the latter means a more profound decline and change in sentiment. To identify them, the foremost requirement is the trader’s ability to determine the trend of the security, which requires knowledge of fundamental and technical analysis.
When it comes to market trading, most of us have sold or bought shares based on current conditions. If the price of the asset we’re holding starts to decline, we start wondering if it is just a market hiccup or a real issue. While this scenario can be pretty infuriating, it is also common. But such situations are commonplace in the trading world. That said, you can avoid them altogether by learning to identify the differences between retracement and reversal of prices.
Reversal
Reversal is the change in the overall trend of an asset’s price. It means that the asset’s price is more likely to move in the reverse direction for a prolonged period. The change in direction may occur to the upside following a downward trend, or the direction may move downside, following an upward trend. In most cases, the change results in a significant asset price shift. That said, there could be some pullbacks, leading the price to recover to its previous direction.
Retracement
Unlike reversal, which can last for an extended period, a retracement is merely a temporary price reversal, taking place within a substantially larger trend. Here, the keyword is that the price reversal is ‘temporary,’ meaning there is no indication of a change in the overall, more significant trend. Upon reading a retracement chart, you will often find that when the price of a stock moves up, it can potentially make a new high. Still, it starts rallying before reaching its previous low when it drops.
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