How frustrating is it to see the price of a pair that you were trading continue to rise and rise until the very moment when you are ready to enter the trade, only to see it then start to fall and fall and fall?

Many people have found themselves in this situation before and are uncertain about how they should have better played the trade in order to be profitable. We want to take a look at trend retracement and reversals to try to determine which is which and how you can profit from them.

What is a Trend Retracement?

Retracements are simply a temporary price movement against the trend of the currency pair. These happen all the time and are a natural part of the trading environment.

 

Traders are often taken in by charts that appear to be headed for a reversal, only to realize too late that they’ve actually stepped into a retracement. Those who are particularly anxious to get into a trade will sometimes believe that they have found a reversal and are ready to take advantage of it.

However, they may be simply looking at a retracement and their trade may start to work against them in very short order.

What is a Trend Reversal?

When an uptrend switches to a downtrend or when a downtrend switches to an uptrend you’re looking at a reversal. It may appear like this:

One way that you can help yourself to take on minimal risk when looking at reversals and retracements is to use a trailing stop loss.This will allow you to ride the current of the trend in your currency while minimizing your risk.

Trailing stop loss will continue to move in the direction of the currency as it works in your favor. Thus, you will never take on more risk than what you initially set when you created the stop-loss order, but your potential for profit can be large if you happen to catch a trend.

If it turns out that what you believed was a reversal is actually a retracement, you will get stopped out, but you will have taken the minimal loss on your trade.