Retracements

Retracements are short-term price moves that move against the prevailing trend within a longer directional move. In an uptrend, a retracement is a temporary decline before prices resume rising; in a downtrend, a retracement is a brief rally before further declines. Retracements differ from reversals in that the overarching trend is expected to continue rather than change direction.

Traders quantify retracements as a percentage of the prior move, using tools such as Fibonacci retracement levels, which commonly include 38.2%, 50%, and 61.8%. Other approaches rely on trendlines, support and resistance, or moving-average interactions to identify likely retracement zones.

Identification and timing depend on swing highs and lows, with retracements occurring when price reacts at defined levels. They can occur on any time frame, from intraday charts to longer-term monthly charts, and are often observed as a pause or pullback within the larger trend.

Trading approaches focus on entering during the continuation phase after a retracement. Common practices include entering on pullbacks in the direction of the trend, with stop losses placed beyond recent swing lows in uptrends or above swing highs in downtrends. Confirmation signals, such as candlestick patterns, volume changes, or momentum indicators, are often used to improve reliability.

Limitations include the possibility of false signals and the difficulty of distinguishing retracements from trend reversals, especially in volatile markets. Level placement is interpretive, and market structure can change rapidly. Retracements remain a core concept in technical analysis and are frequently applied alongside other methods to assess trend continuity. In Elliott Wave theory, retracements are recognized as corrections within impulse waves.