One of the difficulties we face when analyze prices is determining whether the stock is going through a reversal or just a retracement. If we assume that a retracement is in rogress and it turns out to be a reversal we end up giving away too much. At the same time if we assume a reversal then we would be out of the trade too soon. These apply specially for positional traders.
So how do we get a clue whether it is retracement or a reversal? Following are the basic things one should look at.
RETRACEMENT
1. Lack of volatility
2. Small spreads
3. Decreased Volume
REVERSAL
1. Increased Volatility
2. Large spreads. Especially Effort to Fall bars.
3. Increasing volume.
The simplest thing we can do is to draw arrows for the stock movement and the volume. In retracements you will the arrows are in the same direction. And in case of reversal the arrows will be in opposite directions.
Just enclosing an example.
