Temporary changes in the direction of a trading instrument are included in retracement trading. Retracements should not be confused with reversals; reversals indicate a significant change in the trend, whereas retracements are simply temporary pullbacks. Trading retracements keeps you trading in the trend's direction. You are attempting to profit from short-term price reversals within a larger price trend.

You can trade retracements in a variety of ways. You could, for example, use trendlines. Let's take a look at the US500 chart below. The index is clearly in an uptrend, and the rising trendline could have provided a buying opportunity.

A retracement is defined as a temporary change in price movement against the price direction of a financial instrument, such as Forex, stock etc...

Retracement trading is a strategy used in technical analysis where traders take advantage of temporary price reversals within a larger trend. Instead of moving straight up or down, asset prices often experience small pullbacks (retracements) before continuing in the original direction. Traders identify these retracements using tools like Fibonacci levels, moving averages, or support/resistance zones to enter trades at better prices.

For example, in an uptrend, a trader may wait for a pullback to a key Fibonacci level (e.g., 50% or 61.8%) before buying, expecting the trend to resume. Retracement trading requires patience and confirmation to avoid mistaking a reversal for a retracement. Proper risk management is essential to maximise gains while minimising losses.