what is retracement in forex?

A retracement is a temporary reversal in a dominant upward or downward trend.

From the screenshot I attached, the price is in an upward trend but the yellow circle shows the moment a retracement happens after which the upward trend continues strong.

Some traders erroneously exit their trades when they see a retracement because they think the trend is ending, only for the trend to continue.

Some traders also trade the retracement, so they look out for it and trade in the direction of the retracement.

The best way I identify retracements is watching out for when price approaches major resistance/support levels or using the Fibonacci retracement tool.

A retracement in my view, happens when people are cashing out on a moving trend. if the trend is upward, people cash out with their profits by selling and this causes bearish candles to form. However a retracement does not mean the trend is over, its just some traders exiting the market with profits.

Whenever there is an upward or downward trend and people start taking profit & exiting the market, you will see a temporary trend reversal which is called a retracement. It is temporary and does not nullify the trend because after these traders exit with their profits, the trend will continue. Lots of beginner traders confuse retracements for actual trend reversals and exit their positions only for the trend to resume afterwards.

Retracements are opposite candles that form in a trend but they do not have the momentum or volume to reverse the trend direction.

In forex trading, a retracement is a temporary price reversal against the main trend—but not a full trend change.

Think of it as a “small pullback” before the price continues moving in its original direction.

A retracement is when the price moves briefly in the opposite direction of a trend, then returns to continue that trend.

Example:

If EUR/USD is in an uptrend, a short downward dip is a retracement, not necessarily a trend reversal.

Retracements are always the nemesis of beginner traders, they close their trades at the sight of any opposite candle. Traders need to figure out a way of spotting retracements so as not to get spooked out of the market by them. This means having an objective exit plan. Although there are lots of indicators and tools out there that help you spot retracements (such as Fibonacci tool) most of them are unreliable. For me what I do is I always exit trades on a 15 minute time frame to give room for error. So if price starts falling, it must fall on a 15-minute time frame before I see it as a threat.

A retracement is simply a temporary pullback against the main trend.

Think of it this way, if the market is moving up, price won't go straight up forever. It will pause, dip down slightly to "reload," and then continue back in the original direction. That dip is the retracement.

It is not a reversal. The trend is still intact, price is just taking a breather before continuing.