Retracement

A retracement is a temporary move in price that goes against the direction of the larger trend, before that trend continues. Picture a stock climbing steadily from $50 to $60 over a few weeks — if it then drifts back down to $57 before resuming its climb toward $65, that dip to $57 is the retracement.

The key word is temporary. A retracement is a pause or partial reversal within a bigger move, not a change in the overall direction. Traders use the term to distinguish this kind of short-term pullback from an actual trend reversal, where the price genuinely turns and heads the other way for good. The problem is that in the moment, the two look identical — nobody can say with certainty "this is just a retracement" until the price has already resumed its original direction and proven it.

Many traders try to anticipate how far a retracement might go using tools like Fibonacci retracement levels, which mark specific percentages (such as 38%, 50%, or 62%) of the prior move as potential zones where the pullback might stall and reverse back in the trend's favor. These levels are watched widely enough that they can become somewhat self-fulfilling, but they are not a guarantee — price can blow through them and keep going, at which point what looked like a retracement turns out to have been the start of a reversal instead.

The nuance that trips people up is treating "retracement" as something you can identify with confidence while it's happening. In real time, a 10% pullback in an uptrend is just a pullback — it only earns the label "retracement" retroactively, once the uptrend has clearly resumed. Trading as if a drop is "just a retracement" before that's confirmed is a common way to hold a losing position too long.