How to Identify Reversals
Properly distinguishing between retracements and reversals
can reduce the number of losing trades and even
set you up with some winning
trades.
Classifying a price movement as a retracement or a reversal
is very important. It’s up there with paying taxes *cough*.
There are several key differences in distinguishing a temporary
price change retracement from a long-term trend reversal. Here they are:
Retracements
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Reversals
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Usually occurs after huge price movements.
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Can occur at anytime.
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Short-term, short-lived reversal.
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Long-term price movement
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Fundamentals (i.e., the macroeconomic environment)
don’t change.
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Fundamentals DO change, which is usually the catalyst for the
long-term reversal.
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In an uptrend, buying interest is present, making it likely for
price to rally. In a downtrend, selling interest is present, making it
likely for price to decline.
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In an uptrend, there is very little buying interest forcing the
price to fall lower. In a downtrend, there is very little selling interest
forcing the price to rise further.
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