Intermediate Guide

How to Identify Market Reversal and Retracement?

The retracement and the reversal level can reduce the number of negative trades and set up some positive trades.

Retracement Level
  • It will occur after huge directional price movements.
  • It will represent it for a short time.
  • It will do not change fundamental (Macroeconomics environment)
  • In Retracement uptrend the interest rate is present and the price to rally. In the downtrend, selling interest is present and it will make the price decline.
Reversal Trend
  • It will occur at any time.
  • It will show the long term price movement.
  • Do not Change the fundamentals which are a catalyst for long term reversal.
  • In the reversal the uptrend is very little and buying interest is forcing the price to fall. In the downtrend, the very little movement of the selling interest forcing the price to rise further.

Different Methods to Identify Retracements

- Fibonacci Retracement

The Fibonacci level is also called the popular way to identify the retracement of the price movement. The price movement will be retracement over 61.8%, 50.0% 38.2% to the Fibonacci level retracement before going to the overall trend.

If the prices go beyond these levels, then it is an indication that reversal may happen. However it’s not sure that reversal can happen but probability is more.

- Pivot Points

Pivot Points is another way to see if the prices are staging in reversal.

In Downtrend traders will look at the resistance levels (R1, R2, R3) and wait for it to break.

In Uptrend traders will look at the support levels (S1, S2, S3) and wait for it to break.

If any of this level broken then reversal could be in the making.

- Trend Lines

The last method for identification is to use trend lines. When any of the trend line is broken then it may lead to effect reversal. Most of the time market following a major trendline and if it breaks then it’s an indication that buyers are getting weak in the market.

However these methods are not enough as market is always changing. Sometime it can identify with Pivots and sometime it may support trendlines etc.