Most traders will use forex charts to determine trends and when they should be trading. If you are going to be doing this then you need to know about forex charts retracements and reversals. These are two different aspects of forex carts that a lot of people get mixed up. It is important that you know what these points are and how they can affect your trading.
What is a Reversal
When you look at trends in the market you are looking at strong directional movements. All trends will come to an end and when this happens a reversal will occur. The reversal is the complete turn of the trend and the start of another in the opposite direction. These are also known as swings in the market and affect the way that you trade.
What is a Retracement
When you look at forex charts you could easily confuse a retracement for a reversal because of the way that they appear. A retracement will occur during a long-term trend. When the trend has a short movement in the opposite direction before continuing this is a retracement. Retracements are short-term and will not affect the overall movement of a long-term trend.
How Reversals Affect Trading
Once you know about what a reversal is you have to know how it affects your trading. Reversals in the market are seen as exit signals and trading opportunities. The reversal is an exit signal if you have an open position on the trend that is turning. The trade opportunity comes from the fact that a reversal indicates that a new trend is about to begin.
Short-term and medium-term traders benefit the most from these reversals. The long-term trader may also use these as signals depending on the trading strategy that they are going to be using. For swing traders, who are generally medium-term traders, the reversal indicates their trading opportunities. Short-term traders can also profit from the movement as they change the intra-day trends.
How Retracements Affect Trading
Retracements have an odd impact on trading. If you are a long-term trader then you will not actually be affected that much by retracements. These chart movements are simply part of the long-term trend that you are going to be using. Most medium-term traders will also suffer little effect from the retracement. It is the short-term trader that can use a retracement the most.
If you are looking at extreme short-term trading like scalping then you can use the retracement to make a profit. However, if you are looking at slightly longer short-term trading then you are not going to do anything.
Identifying Reversals and Retracements on Forex Charts
When you trade on the forex market it is important that you know how to differentiate between a retracement and a reversal. The start of these chart movements are similar as they both turn in the opposite direction t the trend. However, you cannot trade the same way with them.
Some of the best ways to determine whether a movement is a retracement or a reversal is to look at volume indicators. If there is still a high level of momentum for a trend then the movement is likely to be a retracement and not a reversal.