Retracement
Telling a pullback apart from a reversal
Price does not move in a straight line
Every trend advances in steps. A move up, a pullback, another move up. The pullback is the retracement, and it exists because traders take profits, new sellers enter, and the market pauses before continuing.
Retracements are what make trend trading possible. Without them, every entry would have to be at the extreme of a move, with the stop far away and the reward small. The pullback is the opportunity.
Retracement or reversal
This is the distinction that matters most, and it is not answered by how far price has pulled back. It is answered by structure.
Retracement inside a trend
Optimal entry zone, roughly 62% to 79% of the move
The impulsive move up, from the low to the high. This is the leg being measured.
Price pulls back into the shaded zone and resumes upward. Because the prior higher low was never broken, this is a retracement.
The level that separates the two. Had price closed below this prior low, the move would no longer be a retracement but a potential reversal.
The difference is not about depth. A shallow pullback that breaks structure is a reversal, and a deep one that respects it is still a retracement.
A pullback that respects the previous swing low is a retracement, however deep it goes. A pullback that closes below it is a potential reversal, however shallow. Depth alone tells you nothing, which is why buying a pullback without checking structure is where most trend trades go wrong.
Measuring the pullback
Once you have an impulsive leg, you measure the retracement as a percentage of it. Zero percent is the end of the move, one hundred percent is where it started, and everything useful sits in between.
Equilibrium
The midpoint. Often treated as the minimum acceptable entry.
Zone begins
The start of the preferred entry area.
Common reference
A frequently cited level within the zone.
Zone ends
The deepest level before the move risks being invalidated.
The zone between roughly 62% and 79% is treated as the preferred entry region. Shallower than that and you are paying too much for the position. Deeper and the move is at risk of failing entirely, since a retracement approaching 100% is usually about to become a reversal.
Why the depth changes the trade
The entry price is the one variable that changes your reward to risk without changing anything about your analysis. Two traders can hold identical views and reach opposite outcomes purely through where they entered.
The same leg, two entries
An impulsive move runs from 1.0800 to 1.0900, so 100 pips. Both traders are bullish, both place their stop at 1.0790, and both target a continuation to 1.0960.
Trader A buys a shallow 38% pullback at 1.0862. Risk is 72 pips, reward is 98 pips, so a ratio of 1.4:1.
Trader B waits for 70% at 1.0830. Risk is 40 pips, reward is 130 pips, a ratio of 3.3:1. Same idea, same stop, more than double the return per unit of risk.
Waiting has a cost
The trade-off is real and worth stating plainly. Waiting for a deep retracement means some moves continue without you, and watching a setup you correctly identified run away is genuinely uncomfortable.
The reason to accept it is arithmetic rather than discipline for its own sake. A method producing 3:1 needs to be right only about a third of the time, while one producing 1.4:1 needs to be right well over 40%. Missing some entries is the price of needing to be right less often.
Combining it with the other concepts
A retracement level on its own is just a percentage. It carries weight when the zone contains something else: an order block, an unfilled gap, or a previous level that price reacted to before.
The strongest setups are usually where several of these overlap in the same small area during an active session. That confluence is also what makes waiting bearable, since the entries you do take have more supporting them.
Which leg you measure changes every level. Measuring from a different swing low moves the whole zone, so define in advance which move you are working with and do not re-measure until price gives you a new one.