Pivot Points - Reversal or Retracement
The last method is to use trend lines. When a major trend line is broken, a reversal may be in effect. We've already looked at how to draw trend lines, how support and resistance can affect trend and how moving averages can act as trend lines, so if you're unsure then please revisit the relevant section.
4. Candlestick Patterns
By using trend lines in conjunction with candlestick chart patterns discussed in Module 5, a trader may be able to get a high probability of a reversal.
To Sum Up
You now have the tools to try to differentiate between a retracement and a reversal. Using the "Check List" and the "Identifying Retracement" section will give you a fighting chance. While these methods can identify the difference between retracements and reversals, they aren't the only way. At the end of the day, nothing can substitute for practice and experience. With enough trading time, you can find a method that suits your trading personality in identifying retracements and reversals.
Reversals can happen at any time. Retracements can turn into reversals without warning. This makes using trailing stops very important. With trailing stops, you can effectively prevent yourself from exiting a position too early during a retracement and exit a reversal in a pinch.
Technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.