# Retracement: Definition, Use in Investing, vs. Reversal

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> **Definition**
>
> A retracement refers to the temporary reversal of an overarching trend in a stock's price.

## What Is a Retracement?

A retracement is a technical term used to identify a minor [pullback](https://www.investopedia.com/terms/p/pullback.asp) or change in the direction of a [financial instrument](https://www.investopedia.com/terms/f/financialinstrument.asp) such as a stock or index. Retracements are temporary. They don't indicate a shift in the larger trend.

### Key Takeaways

*   The term retracement is used by technical analysts to analyze the price of securities.
*   Retracement refers to a short-term change in a stock's price relative to an overarching trend.
*   There should be a continuation of the previous trend when a retracement is over.
*   Retracements aren't the same as reversals in which the price of the security must breach support or resistance levels.

## How a Retracement Works

A retracement refers to the temporary reversal of an overarching trend in a stock's price. It's distinct from a [reversal](https://www.investopedia.com/terms/r/reversal.asp). Retracements are short-term periods of movement against a [trend](https://www.investopedia.com/terms/t/trend.asp) followed by a return to the previous trend.

The chart below illustrates the share price of General Electric Co. It shows that the stock is in a [downtrend](https://www.investopedia.com/terms/d/downtrend.asp), but there are points on the chart that indicate that the price is rising. This would be considered a retracement.

![Image](https://www.investopedia.com/thmb/vZ4EXye4TB3-8MMqyb4iYRnvLJM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_final_Retracement_Dec_2020-01-3bb73354c10046fe8ad5c1112c644090.jpg)

*— Image by Sabrina Jiang © Investopedia 2021*

A retracement doesn't say much by itself but it can help a trader identify whether the current trend is likely to continue or if a significant reversal is taking hold when it's combined with other [technical indicators](https://www.investopedia.com/terms/t/technicalindicator.asp).

> **Important**
>
> A retracement should never be used alone. It could cause the analysis to be misguided if it's not used correctly.

## Retracement vs. Reversal

It is essential to determine the difference between a reversal and a short-term retracement. A retracement isn't easy to identify because it can be mistaken for a reversal. Even worse, a reversal could be mistaken for a retracement.

The chart below shows the S&P 500 at a time when a significant [uptrend](https://www.investopedia.com/terms/u/uptrend.asp) took place. Three retracements are identified on the chart but there were a series of smaller ones as well as the S&P 500 was rising to record highs.

The retracements never breached the uptrend. The index did finally fall below the uptrend, however, leading to a sharp decline when what appeared to be a retracement became a reversal.

![Image](https://www.investopedia.com/thmb/X2Hl-8rFS7P1TpTK2Go5ndxlm40=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_final_Retracement_Dec_2020-02-8348561f0b16489c959a730fa189e7da.jpg)

*— Image by Sabrina Jiang © Investopedia 2021*

## What Is a Pullback in Trading?

A pullback occurs when a price drops after it's been moving upward for a time. The price can be associated with a single stock or the overall market.

## What Are Technical Indicators?

Technical indicators are mathematical equations based on historical information. They include Moving Average Convergence Divergence (MACD) and the Accumulation/Distribution Line (A/D Line), among others. They're designed to anticipate stock movement based on the data.

## What Defines an Uptrend?

The price of an asset is said to be experiencing an uptrend when its low prices and high prices over a period have consistently moved upward. There are no dips.

## The Bottom Line

A retracement is a minor or short-term pullback in the price of a stock or index. What's key is that the stock doesn't breach a critical level of [support](https://www.investopedia.com/terms/s/support.asp) or [resistance](https://www.investopedia.com/terms/r/resistance.asp) or the uptrend or downtrend. It's no longer considered a retracement but a reversal if the price falls below or rises above support or resistance, or if it violates an uptrend or downtrend.

> **Article Sources**
>
> 1.  Yahoo! Finance. "[What Is Retracement and How Is It Used in Investing?](https://finance.yahoo.com/news/retracement-used-investing-190533279.html)"
>     
> 2.  FOREX.com. "[Pullback Definition](https://www.forex.com/en-us/glossary/pullback/#:~:text=A%20pullback%20is%20a%20moderate,entry%20into%20an%20aggressive%20market.)."
>     
> 3.  CFI Education. "[Technical Indicator](https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/technical-indicator/)."
>     
> 4.  Fidelity Investments. "[Basic Concepts of Trend](https://www.fidelity.com/learning-center/trading-investing/technical-analysis/basic-concepts-trend)."