What is Retracement?
A retracement is a temporary reversal in the movement of a stock's price.
How Does Retracement Work?
Let's say the stock of company XYZ increased 20% over the course of a day. Anyone who has ever looked at a trend line knows that the price is unlikely to rise continuously throughout the course of the day. Those periods during which the stock price decreases, despite the overall upward trend for the day, are known as retracements.
Why Does Retracement Matter?
Recognizing retracements is important for anyone who performs technical analysis on stocks. Fibonacci Retracements are commonly observed by short-term traders, and are an important aspect of Elliot wave Theory.