How to spot retracements?

How to spot retracements?

As we talked yesterday, there are retracements and reversal for the price. And I also told you that there are no ways to distinguish the two. But that is not exactly true. And although there is no way to know what you are dealing with for sure you can implement some of already learnt tools in order to understand what it is that you are dealing with.

So. Retracements have several main features:

  • They usually occur after huge price movements;
  • They are short-term, short-lived reversals;
  • They have no influence of macroeconomic climate;
  • They are followed by the existing trends.

Main features for the reversal are:

  • They can pop up any time;
  • They are long term;
  • They change the fundamentals of macroeconomic;
  • They are the reversal of the existing trend.

Retracements can be identified with several methods.

1. Fibonacci retracement.

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For the most part price retracements hang around the 38.2%, 50.0% and 61.8% Fibonacci retracement levels before keeping on with the existing trends. Is you spot the price going beyond these levels it is a signal that the price might see the reversal. Note that I say MIGHT, not WILL> there is no such thing as certainty when it comes to this, but we can at least utilize something in order to help us out.

2. Pivot points.

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In uptrend and in downtrend we are going to look at different pivot points in order to understand what is going on.

In uptrending market, traders look at the lower support points [S1, S2, S3] and wait for them to break.

In downtrending market, traders look at the higher resistance points [R1, R2, R3] and wait for them to break.

If you see the lines broken that means that you might be looking at reversal once again.

3. Trend lines.

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It is very simple. When you draw a trend line in you chart and you see the graph breaking it – you are present at the birth of a reversal. The shortest and most understandable point.

All of this requires practice and a lot of understanding in order to really help us see the breakout points.

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