Retracement or Reversal?

What are Retracements?

A retracement is defined as a temporary price movement against the established trend. Another way to look at it is an area of price movement that moves against the trend but returns to continue the trend.

What are Reversals?

Reversals are defined as a change in the overall trend of price. When an uptrend switches to a downtrend, a reversal occurs. When a downtrend switches to an uptrend, a reversal also occurs. Using the same example as above, here's how a reversal looks like.

What Should You Do?

When faced with a possible retracement or reversal, you have three options:

If in a position, you could hold onto your position. This could lead to losses if the retracement turns out to be a longer term reversal.

You could close your position and re-enter if the price starts moving with the overall trend again. Of course there could be a missed trade opportunity if price sharply moves on one-direction. Money is also wasted on spreads if you decide to re-enter.

You could close permanently. This could result in a loss (if price went against you) or a huge profit (if you closed at a top or bottom) depending on the structure of your trade and what happens after.