Difference between Retracements and Reversals

By | January 29, 2014

Wednesday, January 29th, 2014 by Tim Lanoue 

The ability to point out the difference between a retracement and a potential reversal is a great tool to add to your trading arsenal.  Many inexperienced traders along with some of the most experienced traders are still unable to detect the difference between an assets retracement or a potential reversal.  This is why the focus of today’s article is to provide you with the information and knowledge needed to accurately determine whether an assets trend is forming a retracement or preparing for a reversal.

What Are Reversals?

Reversals are temporary changes in an assets trend that occurs over a short period of time.  Oftentimes these reversals can last minutes, hours, or a day; it just depends on what timeframe you are utilizing with your charting solution.  Reversals are oftentimes drastic and do not represent a long continuation of an opposing trend during the assets price action like seen with retracements.  In the pictures below you can see examples of what reversals look like, look at the timeframe of the charts and notice how they occur during a short period of time.

What Are Retracements?

Retracements are momentary reversals that often occur during a longer trend.  Unlike reversals, retracements show a continuation of an opposing trend within the targeted assets price action.  As you can see in the picture below there are a couple retracements that take place and occur throughout a prolonged period of time.

Determining Factors

Dynamics

Reversals

Retracements

Trend of Asset

Mostly neutral, little direction Typically strong bullish/bearish

Pattern Occurrence

Often, double tops/bottoms Limited, occur rarely

Duration of Time

Minutes to hours Days to months

Latest Activity

Can happen during any time Typically after a big gain/loss

Candlesticks

Engulfing, high-wicked, indecisive Typically has long tops/bottoms

 

Importance in Trading

Being able to successfully dictate whether an asset is displaying a reversal or retracement is vital if you want a high success rate trading portfolio.  Research has shown that traders that tend to trade with a longer time frame and expiry time statically displayed a higher win rate than those who traded shorter time frames.  Reversals can be trouble when trading unless you are using reliable trading pattern like the double top and bottom trading pattern and using the appropriate time frame needed.  For those of you who like to trade on the safe side and place trades that often expire in a few days, weeks or months than the ability for you to spot retracements is essential.

Trading binary options is no simple task and oftentimes requires a large foundation of fundamental skills in order to thrive.  The ability to determine whether an asset is displaying retracement or reversal is key if you plan to use trend trading as part of your binary options trading pattern. The most important thing to remember is that reversals often occur during a short duration of time and present no continuation in an assets trend unlike a retracement. If you have any questions please feel free to leave a comment below and checkout the complete list of technical indicators and binary options live charts.

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