What Is a Retracement in Forex Trading?
Short answer: A retracement is a temporary move against the main trend, such as a dip in an uptrend. You measure it as a percentage of the move before it: a 100-pip rise followed by a 40-pip fall is a 40% retracement. A retracement is only a retracement if the trend resumes. If it does not, it was the start of a reversal, which is why every trade needs a stop loss.
An uptrend with a 40% pullback, an entry and a stop below the low. Illustration, October 2026.
Trends move in waves
Markets rarely rise or fall in a straight line. An uptrend is a series of higher highs and higher lows: price rises, falls back part of the way, then rises past the last high. Each fall back is a retracement. A downtrend is the mirror image. Forex trend trading basics covers how to identify a trend in the first place.
Traders who follow trends often prefer to enter during a retracement, because the entry is closer to a level where the stop can go. The cost is that the trend may not resume, and a trader who waits for a pullback can miss the move if none arrives.
How to measure a retracement
Retracement depth is a ratio:
pullback size ÷ size of the previous move × 100
| Prior move | Pullback | Retracement |
|---|---|---|
| 100 pips up | 25 pips down | 25% |
| 100 pips up | 50 pips down | 50% |
| 100 pips up | 80 pips down | 80% |
The deeper the pullback, the more of the earlier move is undone, and the less it looks like a pause. A drop that erases the whole move is no longer a retracement, because price has returned to where it started.
Some traders mark 38.2%, 50% and 61.8% as reference levels. These numbers come from a charting tool and not from a rule of the market. Price can turn at any of them, between them, or go through all three.
Retracement or reversal?
You cannot tell in real time. These checks help after some price action has formed:
- Swing points. In an uptrend, a retracement keeps the last swing low intact. A close below that low is a warning that the trend may have changed.
- Speed. A slow, overlapping drift down is often a pause. A fast drop made of large candles looks more like a change of direction.
- Level. A pullback that stops at known support or resistance has a clear place for a stop.
- Higher time frame. A drop that looks large on a 15-minute chart may be a small wobble on a daily chart. See how to read a forex chart.
All of these are judgements. A trend can survive a deep pullback, and a shallow one can be the first step of a reversal.
A worked example
This is a made-up case. EUR/USD rises from 1.0800 to 1.0900, a 100-pip move, then falls back to 1.0860. The pullback is 40 pips, so the retracement is 40%.
- Entry: buy at 1.0865, after the first candle that closes up from the low.
- Stop loss: 1.0845, below the pullback low. The risk is 20 pips.
- Target: 1.0925, above the last high. The reward is 60 pips.
On a 0.10 lot, one pip is worth about $1, so the risk is about $20 and the reward about $60, a 3:1 ratio before spread and slippage. On a $2,000 account, $20 is 1%. If price closes below 1.0845, the stop is hit and the pullback was not a pause. That outcome is normal and should be planned for. Compare the ratio with risk to reward planning, and use the lot size calculator for other stop distances.
Entry methods
| Method | How it works | Cost |
|---|---|---|
| Limit order at a level | A pending order at a support or resistance area | May never fill, or may fill just before price falls further |
| Market order after a turn | Enter after a candle closes in the trend direction | Later entry, smaller reward |
| Stop order above the pullback high | Enter once price passes the high of the bounce | Can fill at a worse price in a fast move |
See forex order types for how each order works.
Common mistakes
- Buying every dip without a stop, then holding as it becomes a reversal.
- Using a retracement percentage as if it were a promise.
- Ignoring the larger trend and trading a pullback that is against it.
- Using the same lot size for a 20-pip stop and a 60-pip stop.
Practise the routine on a demo account first.
Related chart patterns and levels: the cup and handle pattern, wedge patterns and trading with trend lines.
Bottom line
A retracement is a pullback inside a trend, measured as a percentage of the move before it. Whether a pullback is a pause or a reversal is only clear later, so place the stop where the trend idea is wrong and size the lot from that distance. Reference levels such as 50% are tools for planning, not predictions. Risk only money you can afford to lose. CFDs are complex, high-risk instruments.
Frequently asked questions
What is a retracement in forex?
A retracement is a temporary move against the direction of the main trend. In an uptrend it is a dip, and in a downtrend it is a bounce. Price then continues in the trend direction, or it does not, in which case the move was a reversal.
What is the difference between a retracement and a reversal?
A retracement is a pause inside a trend, and a reversal is a change of the trend itself. You cannot tell them apart while they happen. A common check is whether price breaks the last swing high or low against the trend.
How do you measure a retracement?
Divide the size of the pullback by the size of the move before it. A 100-pip rise followed by a 40-pip fall is a 40% retracement.
How deep can a retracement go?
There is no fixed limit. Traders often watch 38.2%, 50% and 61.8%, but price can stop at any depth or go through all of them. Treat these numbers as reference points, not guarantees.
Where does the stop loss go on a retracement trade?
A common place is beyond the start of the pullback or beyond the previous swing, where the trend idea would be wrong. Size the lot so that distance equals an amount you accept losing.
Is a pullback the same as a retracement?
Traders use the words for the same thing, a short move against the trend. Some use pullback for shallow moves and retracement for deeper ones, but there is no official split.