Article How to Know the Difference Between Retracements and Reversals

[T2W Bot]

Most of us have wondered whether a decline in the price of a stock we’re holding is long-term or a mere market hiccup. Some of us have sold our stock in such a situation, only to see it rise to new highs just days later. This is a frustrating and all too common scenario. Whilst it can’t be totally avoided, if you know how to identify and trade retracements properly, you will start to see improvement in your performance.
Retracements Versus Reversals
Retracements are temporary price reversals that take place within a larger trend. The key here is that these price reversals are temporary and do not indicate a change in the larger trend. A reversal, on the other hand, is when the trend changes direction, meaning that the price is likely to continue in that reversal direction for an extended period of time.
Notice that, despite the retracements, the long-term trend shown in the chart below is still intact. The price of the stock is still going up. When the price moves up, it...

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[slowelim]

Excellent post-Justin, thank you very much!

 

[fibo_trader]

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Already done, your excellency - look here posts #24-27 and more

How do you identify trend?

There a lot of ways to identify trend, but what methods are the most effective, in your opinion?

www.trade2win.com

 

[NVP]

a retracement implies trend holds , a reversal implies new trend ....

so extablish the trend parameters and you can determine the scenaro

am i missing anything here in this ?

 

[barjon]

Interesting article. It’s pretty easy after the event to see that a movement was a retracement and not a reversal (although short term traders may well regard a heavy move like the one shown in apple from 168 to 150 as a reversal!).

I trade retracements in anticipation of trend continuation or, at least, an attempt to do so. Thus, I am looking for the end of the retracement or the reversal of a reversal if you prefer since the indications are similar (albeit not infallible).

if you were already long in Apple why would you let it go from 168 to 150 because it “might” be just a retracement? To my mind it doesn’t really matter if the move is a retracement or the beginnings of a reversal I just don’t want to risk losing or sacrificimg that much.

 

[tomorton]

These are carefully chosen tactics but I don't see a strategy into which they should be fitted.

At least, as it seems to me -

• the short-term CFD or SB or options trader will be leveraged and as a result far too price-sensitive to hold through what might or might not be a retracement.
• the unleveraged medium-term share trader will probably have a holding target period of 6-18 months and should get out when the share price falls by 10% max., whatever the reason
• The long-term buy-and-hold investor should have a target holding period measured in decades. Retracements are irrelevant, possibly so too are temporary (relatively) downtrends. Decisions to sell the shares will probably be made far more on dividend yield and the potential indicated by various other fundamentals than current price or recent price direction.

The concern to distinguish between retracements and reversals seems based in the era when commissions and taxation were much greater concerns, and there was a much more significant cost in disposing of a holding, or perhaps situations of thin liquidity so that re-entry could prove impracticable.

And its a Happy New year from me.

 

[AdamCantor]

These are carefully chosen tactics but I don't see a strategy into which they should be fitted.

At least, as it seems to me -

• the short-term CFD or SB or options trader will be leveraged and as a result far too price-sensitive to hold through what might or might not be a retracement.
• the unleveraged medium-term share trader will probably have a holding target period of 6-18 months and should get out when the share price falls by 10% max., whatever the reason
• The long-term buy-and-hold investor should have a target holding period measured in decades. Retracements are irrelevant, possibly so too are temporary (relatively) downtrends. Decisions to sell the shares will probably be made far more on dividend yield and the potential indicated by various other fundamentals than current price or recent price direction.

The concern to distinguish between retracements and reversals seems based in the era when commissions and taxation were much greater concerns, and there was a much more significant cost in disposing of a holding, or perhaps situations of thin liquidity so that re-entry could prove impracticable.

And its a Happy New year from me.

yep, couldnt have said this better myself haha

 

[fibo_trader]

a retracement implies trend holds , a reversal implies new trend ....

so extablish the trend parameters and you can determine the scenaro

am i missing anything here in this ?

YOU are not missing anything. But the rest of the gang is, as usual. They need to be taken back to Lower Low Lower High and start from there. Wouldn't be a bad idea if a Dow Theory hand slapped 'em around a bit.

 

[fibo_trader]

Interesting article. It’s pretty easy after the event to see that a movement was a retracement and not a reversal (although short term traders may well regard a heavy move like the one shown in apple from 168 to 150 as a reversal!).

I trade retracements in anticipation of trend continuation or, at least, an attempt to do so. Thus, I am looking for the end of the retracement or the reversal of a reversal if you prefer since the indications are similar (albeit not infallible).

if you were already long in Apple why would you let it go from 168 to 150 because it “might” be just a retracement? To my mind it doesn’t really matter if the move is a retracement or the beginnings of a reversal I just don’t want to risk losing or sacrificimg that much.

Incorrect! short-term traders will consider a move from 168 to 150 as a deafening BEAR market. This includes YOU as per your posts elsewhere

So is every Tom, Dick & Harry since biblical times.

(1) Small minded thinker/player/traders think exactly like that and thus never climb to higher levels of GAME
(2) You stay Long because Law 1 of trends = The Trend tends to continue, i.e the odds are in your favor
(3) The prior Low at 142 is intact

To your mind you abuse even a 5-min. trend by bolting with nickel and dimes which means you treat even a small % move against the trend as a REVERSAL = get the fck out fast.

 

[fibo_trader]

if you were already long in Apple why would you let it go from 168 to 150 because it “might” be just a retracement? To my mind it doesn’t really matter if the move is a retracement or the beginnings of a reversal I just don’t want to risk losing or sacrificimg that much.

When Apple started to descend from $168 to near $150, Ed Sekota, Charles Bassetti, Bruce Kovner, Warren Buffet, George Soros, Donald Trump and hundreds of other TREND RIDERS in the world from all sorts of countries would not be fazed because they realize the psychological waste of kahunas and internal power to keep getting in and out of the TREND based on FEAR & smallmindedness - there is a name for such Beta Males - they are known as premature ejaculators. They disgust me!!! Yuk! And from what I know, women hate 'em with a passion. They have zero consideration for the slowness of the oil to get at operating temperature and instead expect 'em to redline within minutes. Idiots!

 

[fibo_trader]

When the descent toward $150 began they most likely would be at the beach or in a foreign country playing, enjoying life, not even bothering to look at the chart except for a quick 30 second look in the evening after market close.

Their motto:

Throw money at the hodge-podge in the BEND in the Trend, lose, get out quick, win? get on the horse and ride and never get off for any stupid reason. Ride the TREND to its natural extinction. Any mistakes and fake outs are immediately thereafter handled by getting right back on the horse and keep riding. Don't listen to News or anybody. Falling off the Black Stallion is a given in long trends - Lucifer plays mischief when we are at our weakest, but we climb back on and keep riding.

The prior LOW is the line in the sand

That natural extinction of the Trend in Apple will be posted here by me. From the date of that post we will then count the number of days and weeks for Ed Sekota and Bruce Kovner to exit Apple. Marketwatch will announce it. We will also get to know exactly when Jack Schannep exits. What we will discover is that Fibo's exit will be near the top but all the others will have surrendered 33%. Been so since biblical times - there were no dollars in 'em days, but sons of b*tches, yeah

God, do I love it so!

Law #2: The Trend can reverse without notice.