Retracement Versus Reversal

Retracement is a short-term price adjustment against the prevailing trend. The small change in price direction signifies nothing permanent, and retracement often works as a form of continuation signal.

There are several ways to distinguish retracements from reversals. First, they are short term, and price quickly resumes the prevailing trend. It is likely to test resistance or support without success. Finally, retracement tends to occur with little or no reversal signal. A reversal, in comparison, is forecast when a clear signal occurs and is confirmed.

Flags and pennants are found at moments of retracement and represent price consolidation. The pattern appears in a direction opposite the prevailing trend, and then ...

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