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MODULE 3: Lesson 3 Copy

Retracements and Pullbacks: Every trader should have a good understanding of how the Trend works. Trends, unfortunately, do not last indefinitely. It will eventually come to a halt or even stop and simply turn around (reversal). Because you don’t want to trade with the Trend at its end, it’s critical to recognize when a reversal could occur. The path of least resistance is being shown by price movement. Two main factors determine the path: energy and resistance. Or, to put it another way, there is a constant battle between momentum (energy), support, and resistance (S&R).Momentum can be more powerful than S&R at times. In some cases, momentum lags behind S&R. If momentum prevails, the price will either continue on its current path with only a minor pause. The stronger the momentum, the faster the price moves without showing divergence. If S&R should win, the price will come to a halt at S&R and then revert to the opposite direction or go sideways. In general, the stronger a support or resistance level’s confluence, the stronger the zone will behave.

Retracements: The length the price in a retracement can go. The Trend usually comes to an end when momentum begins to wane, and support and resistance (S&R) meet in a strong confluence. This is usually when the retracement or reversal begins, and the price moves in the opposite direction of the Trend. The next big question is whether the price will make a slight pullback, a deep retracement, or a complete reversal. The importance of divergence in answering this question cannot be overstated. A reversal becomes more likely when multiple time frames all show divergence. The greater the number of time frames, the more likely a reversal is about to begin. Divergence on the weekly, daily, and 4-hour charts, for example, would put the Trend’s continuation in jeopardy and increase the chances of a trend reversal.