Retracement
A retracement is a temporary price reversal against the prevailing trend. Unlike a reversal, a retracement is a shorter-term pullback before the main trend resumes. Traders use Fibonacci levels and other tools to anticipate where retracements might end.
Understanding the Concept
• Common retracement levels: 38.2%, 50%, 61.8% (Fibonacci) • Shallow retracements (38.2%) suggest strong trend • Deep retracements (61.8%+) may indicate weakening momentum • Entry opportunity for traders who missed the initial move
Real-World Example
Bitcoin rallies from $40,000 to $50,000. It then retraces to $46,000 (40% of the move) before continuing higher to $60,000. Traders who identified this retracement bought the dip at Fibonacci support, getting a better entry than chasing the original breakout.
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