Difference between retracement and reversal:

Difference between retracement and reversal:

Retracement:

It is temporary price reversal which occurs within large trend. The price reversal is  temporary  not permanent. It does not indicate change of large trend .

Characters of retracement:

• ·         Occurs after a large trend
• ·         Occurs in small blocks
• ·         Lasting not more than 2 weeks(1/2 weeks)
• ·         Candlesticks shows long tops or bottoms or spinning tops(indecision candle)

Determining the scope of retracement:

Some tools are used to determine the scope of retracement

1. 1.       Fibbonacci  retracement
2. 2.       Pivot point  for support and resistance
3. 3.       Trend line support and resistance 
4.        Divergence

1.Fibbonacci retracement:

It is excellent tools for determining the scope  of retracement. Most widely used in currency and commodities , share and stocks market .In most of the case retracement will be 38.2% in daily and 50% intraday market movement. If price moves below this point reversal is coming.

2, Pivot point for support and resistance level:

Most commonly used in trading , most traders look for R1,R2,R3 or S1,S2,S3 for resistance and support level, If price breaks these up coming reversal is coming.

3,Trend line  support and resistance:

On trading there are three type trend line , short term trend line, Intermediate trend line and long term trend line, if price breaks  long term trend line , the upcoming reversal, Such as example… in day trading trend line is drawn on 1hrs chart , trading is done on 15 min chart , so if price breaks trend line  of 1hrs time frame  upcoming reversal for day trader.

As trend is relative matter of time , so trader should be drawn trend line on the pattern of their trading.

 4. Divergence

Characters of reversal:

• ·         Occurs in large block trades.
• ·         Several chart pattern occurs  double tops, double bottoms, head and shoulder, inverse head and shoulder,
• ·         Long term reversal lasting couple of weeks
• ·         Reversal candlesticks  forms

How to minimize the risk:

Use stop loss to minimize the risk

·         Estimate the retracement level and put stop loss just below the retracement level.

·         Use Stop loss just below long term trend line or Moving average

Some reversal candlesticks pattern:

1.Hammer candlestick

2.Inverted hammer

3.Harami

4.Bearish harami

5.Bullish Engulfing pattern

6.Bearish engulging pattern

7.shotting star

8.hanging man

Some reversal pattern:

Head and shoulder

inverse Head and shoulder

double tops 

double bottoms

Some continuation pattern:

rectangle

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