Identifying retracements and reversals
The first step to successfully trading reversals is to be able to tell when a price movement is either a retracement (a temporary reversal) or a proper reversal in the prevailing trend.
- A retracement will often happen after a significant price movement. There are a few signs to look out for to determine if this is a brief trend. If the price is trending downwards then there will be interest in selling, and if it’s trending upwards there will be interest in buying, as traders will typically be expecting this trend to continue. If you’re using Fibonacci Retracement levels, you may well see the retracement begin to shift at 50% or 61.8% of the full range.
- A reversal often occurs following a change in fundamentals, such as an economic release. One sign of a possible reversal is that there isn’t much interest in buying in an uptrend or selling in a downtrend, which means the movement is less likely to reverse. If using Fibonacci Extension levels, you might expect the reversal to occur at around 161.8% of the full range. The price may also break through either the lower support points or the higher resistance points if you're using pivot points, and also through the trend line.
Risk Warning: Investing in Margin FX products carries a high degree of risk and is not suitable for all investors.