Technical & Chart AnalysisCorrectionRetrace
Retracement
A temporary counter-trend move that gives back part of a prior advance or decline before the trend resumes.
What Retracement means
A retracement is a temporary counter-trend move that gives back part of a prior advance or decline before the dominant trend resumes. It is measured as a percentage of the completed leg, so a rally from 1.0700 to 1.0900 that falls back to 1.0800 has retraced 50%. Retracements arise naturally from profit taking, hedging and short-term participants fading an extended move, and they are what allow trend traders to enter at a better price than a chase entry at the high.
The practical question is where a retracement ends and a reversal begins. Common reference points include Fibonacci levels at 38.2%, 50% and 61.8%, prior swing points, a rising moving average, and the boundary of a channel. Many traders treat a retreat beyond the origin of the prior leg, or a break of the last higher low, as the point at which the move should be reclassified as a reversal. The limitation is that no depth of retracement reliably distinguishes the two in advance.
Worked example
EUR/USD rallies 200 pips from 1.0700 to 1.0900, then falls to 1.0824, a 38.2% retracement; a trend trader buys there with a stop below the 61.8% level at 1.0770.
Related terms
- Fibonacci RetracementHorizontal levels at 23.6%, 38.2%, 50%, 61.8% and 78.6% of a prior swing, used to anticipate where a pullback may end.
- PullbackA short counter-trend pause or dip within an established trend, often used as a lower-risk entry point.
- TrendA sustained directional bias in price, conventionally defined by a sequence of higher highs and higher lows, or the reverse.
- SupportA price area where buying interest has previously been strong enough to halt or reverse a decline.
Frequently asked questions
What does Retracement mean in forex trading?
A temporary counter-trend move that gives back part of a prior advance or decline before the trend resumes.
How does Retracement work in practice?
The practical question is where a retracement ends and a reversal begins. Common reference points include Fibonacci levels at 38.2%, 50% and 61.8%, prior swing points, a rising moving average, and the boundary of a channel. Many traders treat a retreat beyond the origin of the prior leg, or a break of the last higher low, as the point at which the move should be reclassified as a reversal. The limitation is that no depth of retracement reliably distinguishes the two in advance.
What is an example of Retracement?
EUR/USD rallies 200 pips from 1.0700 to 1.0900, then falls to 1.0824, a 38.2% retracement; a trend trader buys there with a stop below the 61.8% level at 1.0770.
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