Identifying 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:

Identifying Retracements

A popular way to identify retracements is to use Fibonacci levels.

For the most part, price retracements hang around the 38.2%, 50.0% and 61.8% Fibonacci retracement levels before continuing the overall trend.

If price goes beyond these levels, it may signal that a reversal is happening. Notice how we didn't say will. As you may have figured out by now, technical analysis isn't an exact science, which means nothing certain... especially in forex markets.

 Another way is using Price Action Strategy. Will discuss about this later.