As traders, we have all wondered from time to time whether a certain rally or sell-off is a long term move or a mere market hiccup. And trust me it can be difficult to determine which side of the trade to play. I myself have sold stocks right before new highs were made just days later – it sucks but it happens to all of us.
This is a frustrating and all too common scenario, but it can be avoided if you know how to identify and trade retracements properly.
Retracements vs. Reversal
The table below is a great quick tool to help you determine where the stock or market may be in a cycle. Without at least glancing at this table you risk a lot as a trader; exiting too soon and missing profit opportunities, holding onto losing positions and losing money, and wasting money on commissions/spreads.
Even a picture perfect retracement that meets all the criteria outlined in our table above may turn into a full out reversal. Just because it meets all these criteria does not mean that the market cannot do something unexpected right? So the best way to protect yourself as always is to use stop-loss orders.
Current RUT Chart: Retracement or Reversal?
In the comments section, add your thoughts on whether the current chart below of the RUT is a retracement or reversal…