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 price trend. When an uptrend switches to a downtrend, a reversal occurs. When a downtrend switches to an uptrend, a reversal also occurs. Using the same example above, here’s what a reversal looks like.
When faced with a possible retracement or reversal, you have three options: If in a position, you could hold onto your position. This could lead to losses if the retracement turns out to be a longer-term reversal. You could close your position and re-enter if the price starts moving with the overall trend again. Of course, a trade opportunity could be missed if the price sharply moves in one direction. Money is also wasted on spreads if you decide to re-enter. You could close permanently. This could result in a loss (if the price went against you) or a considerable profit (if you closed at a top or bottom), depending on your trade’s structure and what happens afterward.
Because reversals can happen anytime, choosing the best option isn’t always easy. This is why trailing stop loss points can be a significant risk management technique when trading with the trend. You can employ it to protect your profits and ensure you always leave with some pips if a long-term reversal happens.