In plain English
What Retracement means
Retracement describes the amount of a previous move that price has retraced, or given back. For example, after a rise from 100 to 120, a drop to 110 retraces half of that 20-point rise. Some charting methods plot percentage zones, including Fibonacci ratios, to organize this comparison, but the levels are analytical reference points rather than fixed market rules.
Why it matters
Measuring a retracement helps put a countertrend move in context. A 10-pip decline has a different meaning after a 15-pip rise than after a 300-pip rise. It can also help distinguish a routine pause from a potentially larger change, although no retracement percentage can reliably determine future direction or limit losses.
Example
GBP/USD rises from 1.2500 to 1.2700, a 200-pip move. It then falls to 1.2620, down 80 pips from the high. The decline is a 40% retracement of the prior advance because 80 divided by 200 equals 0.40. Values are simplified and exclude transaction costs.
Quick answers
Common questions
How is a retracement percentage calculated?+
Measure the countertrend move and divide it by the size of the preceding directional move. For an advance from 100 to 120 followed by a fall to 112, the retracement is 8 divided by 20, or 40%.
Is a retracement always temporary?+
It is described as partial while the earlier move remains the reference. If price continues far enough to establish a lasting change in the broader trend, analysts may subsequently classify the move as a reversal instead.
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