A trade retracement is a temporary reversal in the direction of the main trend.
As price moves, it always pulls back to correct its swing movement. This can be well explained by the forces of demand and supply in the market. As demand increases in relation to supply, it will reach a point where it cannot be met by supply. Therefore, for it to be in equilibrium suppliers will increase prices making it expensive to buy hence pushing demand back to its normal point where it will find its stability, this is a reversal. Or prices will fall back as more suppliers tend to join the market due to increased demand for the new product.
In the forex market, as more buyers are attracted by low prices in the market, the shock of many buyers lead to the hike of prices. Meanwhile some of the traders take advantage of high price by starting to sell when prices are still high to get a higher profit. This may lead to a temporally fall in prices causing a trade retracement in an upward swing.
For a downward swing a trade retracement would be caused by a temporally increase in prices due to many trader getting in the market to buy at very low prices. As more buyers get in the market, prices tend to increase due the increase in the demand for the currency.it creates a shock on prices and tend to make a swift swing reacting to the behavior of traders.
So what is a trend retracement?
A retracement is a temporary reversal in a trend direction of currency prices. Price moves shortly to the opposite direction of the trend before it continues to its original direction.
It’s one of the most frustrating thing that happens to many traders watching their positions stopped out prematurely by price only after price moves back to the predicted direction.
To avoid this, make use of technical indicators such as Fibonacci retracements, trend lines, support and resistance and pivot points so that you are able to monitor such levels in current trend.
Prices reversed temporarily at level 23.6 of the Fibonacci retracement before before continuing to its original direction.
Now that you have learnt how to identify a trade retracement you will be able to come up with a strategy that will save you from premature stop outs and know how to deal with them when identified on an open trade.