A “Retracement” is a price reversal within the trend of a financial instrument and is usually temporary therefore it does not indicate an actual change in the trend.

Investors sometimes wonder whether the price correction of a financial instrument (decrease or increase) implies a trend reversal or just a retracement.

Retracements generally occur when the price of a financial instrument reaches a strong “Support” or “Resistance” level and fails to break, or when the market condition is overbought or oversold and there are no more traders available to continue trading in the same direction.

This leads to profit-taking and therefore to a retracement.