Reversal Vs Retracement Trading

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Reversal Vs Retracement Trading

The understanding of differences between retracement and reversal of stock prices is crucial in making an informed investment decision. While a reversal is the change in the overall trend of a stock’s or asset’s price, which can last for an extended period, a retracement is merely a temporary price reversal that takes place within a substantially larger trend.

In simpler words, reversal means that the price of the asset is likely to continue to move in the reverse direction for a prolonged period. In case of the retracement, the price reversal is temporary.

How is Retracement Different from Reversal?

The differences between retracement and reversal can be analysed based on six points.

  • Volume

Retracement is characterised by a small selling volume while reversal is characterised by a large selling volume involving institutional selling.

  • Money Flow

Buying and selling interest continues to be present during retracement while it is missing or quite small in case of reversal.

  • Chart patterns

There are very few changes in chart patterns in case of retracement, however, there are several significant pattern changes in case of reversal.

  • Time frame

Retracement generally lasts for a shorter term and ends within days, whereas reversal can last for a long-term lasting more than a few weeks.

  • Fundamentals

The fundamentals remain unchanged for a retracement while they change in case of reversal.

Disclaimer: The information provided is for educational purposes only. Please seek expert advice before making investment decisions.

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Knowing the distinction between a retracement and a reversal is essential when making investment choices in the stock market. A retracement is essentially a temporary drop or pullback in price within a larger existing trend, whereas a reversal indicates a total shift in the overall direction of the trend, which may persist for much longer. A number of factors serve to differentiate the two. For instance, retracements tend to occur with decreased trading volume and do not incorporate significant alterations in a company’s fundamentals. However, reversals tend to arrive with high trading volume — often prompted by institutional selling — and are typically supported by drastic alterations in fundamentals or investor attitudes. Retracements also tend to last only for a few days, while reversals may last for weeks or even months. Chart patterns in reversals indicate more extreme changes, while retracements reflect little change in patterns. Being able to recognize the difference can prevent investors from panic-selling during transient pullbacks or to acknowledge when it’s time to reassess a position during an actual trend reversal.