Retracement

Family VI · Charts & indicators

Not to be confused with fibonacci retracement.

Retracement is a counter-trend price move that gives back part of a preceding trend without reversing it. It is identified after the fact by the trend continuing beyond the retracement's starting point. Retracements are measured as a proportion of the prior move, most commonly between one-third and two-thirds of its length.

How a retracement is measured

A retracement is quantified by comparing the size of the counter-trend move with the size of the impulse that preceded it. If a market rises from 100 to 150 and then falls to 130, the 20-point decline is a retracement of the 50-point advance.

The ratio is expressed as a percentage of the prior move. Traders often watch the 38.2%, 50% and 61.8% levels, though these proportions are conventions rather than rules, and the levels at which a retracement actually ends vary by market and timeframe.

Worked example

The 40% figure places the pullback between the 38.2% and 50% levels. If price later trades above 150.00, the move is confirmed as a retracement rather than a reversal.

Retracement versus reversal

The distinction is settled only by what follows. A retracement ends when the original trend resumes and price exceeds the prior extreme; if price instead continues against the trend and breaks the starting point of the prior move, the move is a reversal.

Because the outcome is not known in advance, retracement levels are used as reference points for planning entries, exits and stop placement, not as predictions. Depth and duration of retracements differ widely across instruments and timeframes.

Often confused with

fibonacci retracement

A fibonacci retracement is a specific charting tool that draws horizontal levels at fixed ratios such as 38.2% and 61.8% of a prior move, whereas a retracement is the price move itself; the visible sign is the set of labelled horizontal lines on the chart.

See also

• forex technical analysis indicators
• price action
• fundamental analysis
• support and resistance
• technical analysis
• fibonacci