Retracements and reversals - how to deal with the two?

Retracements and reversals - how to deal with the two?

Some time ago we have been talking about entering the trades too early or too late. Well, now that we are talking about market environment, it is appropriate to talk about not getting out of the trade too soon. And that what leads us to the question how do we distinguish between retracements and trend reversal?

We all have been there. We see the price starting going down, we pull out at what we think a good moment, and a price starts going even higher after that! Well, hell! You’ve been bamboozled!

That is never a good thing and it never feels good, that I have to day. So, today we are talking about both of them.

What is retracement? Retracement is a short-period price movement against an existing trend. Its main feature is that after a short period of time it is going to come back to the same trend.

Trend reversal on the other hand is the overall shift of the price in the opposite direction from an existing trend.

That is easy, right? So, how do we distinguish between the two in those first most important seconds on the price change?

Here I have to tell you – there is no way to distinguish between those. There are only three things you can do when you see a price movement:

  • You can hold onto your position which could lead to losses in case a retracement turns out to be a reversal.
  • You can close and re-enter on the trend establishment. But here you can also experience losses as there is the possibility of a rapid price movement.
  • You can permanently close the deal and watch the graph go nuts. But in this case you are losing the possibility to earn at least some pips.

Man! We can’t win here! But it is fine. Why else would we study all these things? To know how to be a good trader even when the market is throwing you under a bus.