Imagine this scenario. Price starts to rise. Keeps rising. Then it starts falling.
And falling some more. And then it starts going back up.
Have you ever been in this situation before?
A retracement is defined as a temporary price movement against the established trend.
Another way to look at it is an area of price movement that moves against the trend but returns to continue the trend.
Reversals are defined as a change in the overall trend of price.
Using the same example as above, here’s how a reversal looks like.
When faced with a possible retracement or reversal, you have three options:
1. Hold Your Position
2. Close your position and re-enter if the price starts moving with the overall trend again.
3. You could close permanently. This could result in a loss (if price went against you) or a huge profit (if you closed at a top or bottom) depending on the structure of your trade.
What happens after?
The reversals can happen at any time, choosing the best option isn’t always easy.
This is why using trailing stop loss points can be a great risk management technique when trading with the trend.
You can employ it to protect your profits and make sure that you will always walk away with some pips in the event that a long-term reversal happens.