A retracement is a brief price movement in an asset or security that runs counter to the overall trend, before resuming its previous direction. A retracement is a pullback or pause in an overall directional trend – the stock price or index experiences a period of decline and then returns to the previous high. To the untrained eye, it may look like the previous uptrend has reversed and is now headed south. This can be especially true if a long−term uptrend suddenly experiences a sharp dip.

Retracements generally indicate a weakening of the trend rather than a complete reversal. For example, an uptrend that starts out strong might experience a pullback, but if its resume normal activity, it will continue on it's upward trajectory. As long as its return to its pre-pullback level hasn't breached a support or resistance level, it can be considered a market retracement rather than outright reversal.

Technical analysts will use retracements as a way of determining potential levels of support or resistance in price movements, as well as placing buy and sell orders. In addition, they often use the Fibonacci sequence to measure prices, a sequence of numbers derived from a mathematical equation. This sequence starts at 0 and 1, and adds the last two numbers to get the next – 0, 1, 1, 2, 3, 5, 8, 13, 21, etc. These numbers are considered a key indicator by traders as they help establish levels at which trading may occur.

The most common use of retracements is to determine entry and exit points for a particular trading strategy. A trader will look for trends in the stock or index, then use a retracement to help establish where the price could reverse or consolidate. It is possible to enter or exit the market early if the retracement generates a false signal, so it is important to keep a close eye on price movements.

Retracements can be used by virtually any type of trader, from long-term investors to day traders. By monitoring retracements on the chart, they can predict when the stock or index will reverse or consolidate, giving them an edge when entering or exiting the market. In addition, the Fibonacci sequence can be used to help establish points where trading activity can occur. Although retracements don't always work as expected, they offer traders a valuable tool for predicting and capitalizing on price movements.