Retracement Definition

Dictionary of Financial Terms

Retracement measures the percentage increase or decrease a stock moves in the same direction after hitting a new high or low. For example, if a stock moves from a low of $50 to a high of $100 -- a 50-point rise -- then it hits $75 -- a 25-point move from $100 -- the move from $100 to $75 (25 points), even though it's gone lower, actually retraced 50% of the original 50-point gain from $50 to $100.

Because $75 is higher than the $50 low -- though obviously not as high as $100 -- the stock is still considered as having advanced. Hence by hitting $75, the stock has retraced 50% of the original gain to $100.

Another way to put it (without the math) is: After an advance, a retracement is a decline that follows the path of (retraces) a portion of the previous advance. After a decline, a retracement is an advance that retraces a portion of the previous decline. Retracements typically cover 1/3 to 2/3 of the previous move.

Definitions of Financial Terms