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Retracement When a Market Decline is Only Temporary

For the inexperienced trader, it is often hard to accept the fact that the market is going to experience both increase and decline, and there's just nothing that you can do about it. What is reassuring, is that as you become more familiar with the cyclical way that the market's forces drive the prices up and down, you'll start to realize that these fluctuations aren't something to be feared, but are rather something to be exploited for the profit of your own portfolio. In the stock market, timing is everything, and a retracement is a temporary price reversal that can prevent you from unloading your holdings too early.

Periods of growth are exciting for all investors, as they start to see the potential for eventually selling their stocks for more than they paid for them. However, when poised at the beginning of a decline, all investors start to wonder whether they are in for a long period of reduced values, which could potentially cost them money. All investors want to know whether the downtrend will become dominant or whether the decline is only temporary, as is the case with a retracement. In the investing world, the permanent end of an uptrend is called a reversal.

It's never fun to watch your stock's value drop slowly, day by day, but it's also important to restrain yourself from giving in to the panic, and selling everything you have too soon. Learning to spot the differences between a retracement and a reversal can help you prevent this. Try as they might, even the most experienced investors can be fooled by the retracement, which often has the appearance of a reversal at first, but doesn't come along with all the long term negative effects that a reversal can have on your portfolio.

Investors that are able to tell the difference between these chart signals will be able to prevent themselves from giving into emotion, making the decision to get rid of stock that is only having a bad day. The last thing you want is to wipe your hands of a security, when an uptrend is likely to return just around the corner. One of the most important characteristics to look for is length of time. A retracement will last under two weeks, while a reversal is usually longer. Volume can also be used as an indicator, as a retracement will usually result in small block trades, while a reversal will be accompanied by large industrial block trades.

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