Differentiating retracements from reversals

Hello to all. As the title suggests, I’m interested in finding what techniques you use to know when price is retracing vs reversing. Thanks

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hi, statistical advantage and financial instrument. Regards Greg

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Absolutely. :sunglasses:

Ultimately, it’s (almost) all about statistics and probability (like most of trading).

You have to use whatever techniques you can prove, by reliable testing, confer a statistical advantage.

Those are going to be different ones for different people, trading different financial instruments in different ways, so there’s no universal “right answer,” nor should we expect one.

In general, it’s actually one of the harder questions of trading!

There’s one very common mistake to avoid, however: the erroneous belief that "adding extra indicators as ‘filters’ " is going to be a reliable way to do that. It almost never will be, for the (actually fairly obvious) reason that if the subsequent price action confounds the initial indicators, it’s usually going to confound the additional ones, too.

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generally, all depends on from how you use indicators, if you add too many, you will overfit strategy, if you use one which improve results, that is ok.

That’s actually why I posed the question in the first place, as I found indicators to be less reliable than what most people claim them to be.


That’s for sure. :slightly_smiling_face: :+1:

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The difficulty of distinguishing retracements from reversals is the main reason why I tend to enter on pre-set orders rather than live. A bearish pull-back is a good pre-cursor to a resumption of an uptrend, so it’s very simple to set a buy order higher than the low prices in the retracement structure - if price resumes the uptrend, the order is triggered. But if it doesn’t and price continues to fall, the order is not triggered and nothing is lost.

I can’t 100% distinguish between the start of a retracement and the start of a reversal, but I am 100% certain that my strategy will react differently to each.


I actually do the same in order to minimize my risk of making a wrong analysis

When price retraces, it means it’s pulling back temporarily within its current trend. This is often identified by smaller price movements against the overall trend direction.

When price reverses, it means it’s changing direction completely, potentially signaling the end of the current trend. This is typically marked by larger price movements that break previous support or resistance levels.

To distinguish between the two:

  • Watch how far price moves against the trend. Small retracements usually indicate continuation, while large movements suggest a possible reversal.
  • Look for confirmation from key levels like support, resistance, and trendlines. Bounces off these levels indicate retracement, while breaks suggest reversal.
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