A retracement is a temporary reversal in the direction of an asset’s price within a larger trend. For example, in an uptrend, a retracement refers to a short-term price dip before the upward movement resumes. Traders use retracements to identify potential entry points or confirm support and resistance levels. Tools like Fibonacci retracement levels help estimate how far a pullback might go. Distinguishing retracements from full trend reversals is crucial for maintaining profitable positions. Retracements are common in volatile markets and are often seen as healthy corrections that prevent asset prices from becoming overheated.
Example:
After rallying 20%, a stock pulls back 5% before continuing its upward trend.
