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WHAT ARE RETRACEMENTS IN TRADING AND WHY ARE THEY IMPORTANT?

Home / Guides / What are retracements in trading and why are they important?
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Asset prices do not move in straight lines. Prices go up, meet resistance,
retrace and go down, where they meet support and retrace again. On the chart,
you will be able to see the volatility more clearly.

Understanding retracement in Forex is important as it helps better plan your
entries and exits. Retracement levels also help short term traders and scalpers.
There are various indicators and techniques that help traders predict
retracement levels. Let’s find more about what retracements are and how to use
them in trading.


THINGS TO KNOW ABOUT RETRACEMENTS IN TRADING

 * Market trends are sensitive to news, which makes any prevailing trend
   susceptible to either a retracement, or a full reversal
 * Retracements are more visible in a shorter time frame, while reversals have
   longer-lasting effects
 * Retracements and pullbacks in strong trends enable traders to enter markets
   in the trend direction and use retracements to find Stop Loss targets
 * Retracements and reversals have support and resistance levels and are not
   universally consistent
 * Fibonacci Retracement indicator is often used to gauge the support and
   resistance levels in a particular price swing


HOW CAN TRADERS ANTICIPATE A RETRACEMENT?

Anticipating retracement in trading can help speculative traders find trading
opportunities. If you can locate a strong level that can cause a reversal or a
retracement, you might have a trading opportunity with good risk to reward
ratio.

There are several factors that can reverse or cause retracements from general
trends. These factors include fundamental and technical factors and increased
volatility.


ECONOMIC NEWS



One factor that can never be overlooked when trading is the news. Global markets
are ever changing and thousands of different variables can affect prices.

When trying to anticipate a retracement, traders need to keep an eye on the
economic calendar. Market news can cause price hikes in any direction.

Central bank’s main purpose is to fight inflation. In order to do so, they try
to make national currencies stronger when inflation increases. Economic policies
run by governments and banks can retrace or reverse currency prices.


VOLATILITY AND VOLUME

Another way of predicting retracements can be found in volatility and trading
volume figures. When a pair is depreciating at an alarming rate, the volume
typically increases. The decline in volume can indicate a reversal or a
retracement.

Increase in volume within a trend means that traders are interested in the asset
and new orders can keep prices moving further towards the trend direction. Drop
in volume indicates the loss of interest and may result in a shift in trading
direction.


TECHNICAL ANALYSIS

Simply observing the chart can provide a great insight into the possible
retracement levels for a given pair. While markets are characterized by
efficiency, certain factors can cause traders to overbuy/oversell, which leads
to a necessary price correction. These corrections often take the form of
retracements.

upport and resistance trend lines are highly used for forecasting retracements.


SUPPORT AND RESISTANCE LEVELS

Support and resistance levels are highly used in trading. The levels can be
horizontal or trendlines. They work as retracements because many people use them
in their analysis. When the price gets close to the support and resistance
levels, traders start placing orders, consequently, the price either breaks the
significant level or retraces.


FIBONACCI RETRACEMENT LEVELS IN TRADING

Fibonacci retracement indicator is based on fibonacci numbers. The indicator is
highly used to anticipate retracement levels.

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Traders use the Fibonacci sequence when trying to identify these support and
resistance levels.

In the Fibonacci indicator, Fibonacci levels are lines drawn across a chart that
connect two points that create a support or resistance level.

Each Fibonacci level is denoted as a percentage and shows the degree of
retracement compared to a prior price point.

The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. In addition
to these numbers, traders are using the 50% level, even though it’s not a
Fibonacci number, it is highly used in Fibonacci Retracements. In addition, 100%
and 161.8% levels are also significant in the Fibonacci Retracement indicator.

Fibonacci levels represent possible price points that might work as support and
resistance levels when the price reaches them.

When traders are using Fibonacci Retracement indicators, calculations are
automatically made by the trading platform and the levels and numbers are
displayed. Traders connect the high and low points of prior price swing to
create and draw the Fibonacci indicator on the chart. The main expectation is
that these levels will act as significant levels once the price reaches them.




THE MAIN TAKEAWAYS

 * Retracements are brief counter trends that do not cause a full reversal
 * Prices do not move in straight lines. They reach certain resistance or
   support and retrace. Understanding retracement in Forex can help traders
   better find trading opportunities
 * Retracements are frequent in the price charts of highly volatile assets
 * Retracements enable traders to join already established strong trends
 * Retracements happen at significant levels and they can grant great trading
   opportunities to short term speculators
 * Traders use Fibonacci levels to measure and predict retracements


FAQS ON RETRACEMENT IN TRADING

WHAT IS A RETRACEMENT?

A retracement refers to a minor change in the direction of the price of an
asset. Retracements often do not indicate a full trend reversal and can be
caused by smaller-scale positive news reaching the markets.

ARE RETRACEMENTS BULLISH?

Retracements can be bullish or bearish, depending on the broader trend. A
retracement of a bullish trend would be bearish and vice versa.

WHAT ARE FIBONACCI RETRACEMENT LEVELS?

Fibonacci retracement levels are support and resistance levels at which prices
start to make a rebound. The levels consist of percentage points of Fibonacci
numbers that are calculated by simply drawing a line between two specific price
points on a chart.

HOW DO YOU TRADE RETRACEMENT?

Retracements are spotted using levels and indicators. Traders usually use
retracement levels in combination with various indicators and trading
strategies.


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intended to be a solicitation. Please fully understand and understand the risks
associated with investing before trading.

© Copyright 2023 BestFXMarkets.com | Privacy Policy | Terms & Conditions |
Cookie Policy | Get in touch

 * Home
 * Best FX Brokers
   * Market Makers
   * Multi-Asset Brokers
   * ECN Brokers
   * No Dealing Desk
   * STP Execution
   * Prop Trading
 * Promotions
 * Learn FX Markets
   * Terminology
   * Strategies
   * Indicators
   * Guides
   * Cryptocurrencies
 * News
 * English

© Copyright 2023 BestFXMarkets.com | Privacy Policy | Terms & Conditions |
Cookie Policy | Get in touch