What Is a Retracement?

A retracement is a technical term used to identify a minor pullback or change in the direction of a 澳洲幸运5官方开奖结果体彩网:financial instrument such as a stock or index. Retraceme🌱nts are tempora♉ry. They don't indicate a shift in the larger trend.

How a Retracement Works

A retracement refers to the temporary reversal of an overarching trend in a stock's price. It's distinct from a reversal. Retracements are short-term periods of movement against a trend followed by a return to the previous trend.

The chart below illustrates the share price of General Electric Co. It shows that the stock is in a 澳洲幸运5官方开奖结果体彩网:downtrend, but there are points on the chart that indicate that the price is rising. T🙈his would be considered a retracement.

A retracement doesn't say much by itself but it can help a trader identify whether the current trend is likely to continue or if a significant reversal is taking hold when it's combined with other 澳洲幸运5官方开奖结果体彩网:technical indicators.

Retracement vs. Reversal

It is essential to determine the difference between a reversal and a short-term retracement. A retracement isn't easy to identify because it can be mistaken for a reversal. Even worse, a reversal could be mistaken for a retracement.

The chart below shows the S&P 500 at a time when a significant uptrend took place. Three retracements are identified on �𒉰�the chart but there were a series of smaller ones as well as the S&P 500 was rising to record highs.

The retracements never breached the uptrend. The index did fiꩵnally fall below the uptrend, however, leading to a sharp decline when what🤪 appeared to be a retracement became a reversal.

The Bottom Line

A retracement is a minor or short-term pullback in the price of a stock or index. What's key is that the stock doesn't breach a critical level of support or 澳洲幸运5官方开奖结果体彩网:resistance or the uptrend or downtrend. It's no longer considered a retracement but a re🍒versal if the price falls below or rises ab🌄ove support or resistance, or if it violates an uptrend or downtrend.