Trend reversal and trend retracement are two issues that are easily confused with each other, the wrong perception will cause losses, psychological confusion, and even skepticism about the trading system.
Today, I share how to distinguish between trend reversal and trend retracement by technical analysis in a simple, recognizable and highly accurate way.
Here are some signs and characteristics:
Trend reversal:
1. Usually, before reversing, the price chart will establish a pattern of 2 tops / 2 bottoms, or a head and shoulders pattern (or its variation).
2. At the top/bottom area - where the trend reversal occurs, the trading volume usually increases.
3. Divergence may occur in the trend reversal area.
4. Depending on the pressure of the trend, the probability of a reversal is high or low. With a strong and prolonged trend, to reverse the trend will need a period of time but cannot happen quickly, it may move sideways within a certain range and then actually reverse. In other words, if you choose the peak/trough trading method to trade against the trend - catch the reversal waves, you are choosing the "harder path" than choosing to trade in the right direction according to the trend.
5. Trend reversal needs large trading volume to absorb the market's supply/demand, so it's important to pay attention to the timing factor in the transaction (session, trading cycle).
6. Trend reversal trading options can yield a very good R:R ratio. If you follow the trading discipline, and have the right strategy, then even if you predict many times wrong but a few times correct, you will still make a profit.
7. Each time frame has its own trend, so the reversal can happen only on the small time frame, but it is only a retracement on the large time frame, that is obvious.
Trend retracement:
1. Usually when the trend retraces, then resumes the main trend, the price chart has only 1 top / 1 bottom.
2. At the price retracement area, the volume will usually decrease compared to the average volume when the price continues the trend.
3. Usually a trend retracement does not occur with a divergence, or a "false divergence".
4. Depending on the pressure of the trend, the probability of a trend retracement is high or low. With a strong and prolonged trend, the possibility of a trend retracement is very high, even occurring many times. In other words, if you choose to trade retracement waves to trade with the trend, you are choosing the "easier path" than choosing to trade against the trend.
5. It is necessary to combine more timing factors to increase the efficiency of forecasting.
6. If you choose to trade with the trend, and enter on retracement waves, the R:R ratio will not be as good as trading against the trend, but the risk is much lower. In financial investment, you should put risk management as a top priority, so it can go a long way.
7. Each timeframe has its own trend, so a trend retracement can only happen on a large timeframe, but it is a reversal on a small timeframe, which is reasonable.
Above are some characteristics and differences between trend reversal and trend retracement. To truly understand and forecast with high accuracy, anyone needs real trading experience. Only the path of hard work will bring them to the expert level, then predicting the market will not be difficult anymore.
Wish you success, please share if the article is useful.
Best regards,
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