A retracement is when a currency pair reverses its direction and moves in the opposite direction of a previous trend.
Forex pairs usually move in trends or sideways. That is, sometimes, buyers or sellers prevail, and the market is predominantly one-sided and moves in one direction. In such a case, the market is moving in a trend.
Despite this, markets hardly move in a straight line. They usually move in zigzag shapes or waves. Thus, even in an uptrend, you see some downwards pull back movements. This happens because even if the buyers are prevailing, there will be some sellers from time to time, and people have different convictions about where the...
Retracements and reversals, along with expansion and consolidation, are separate elements of price action.
A retracement is a price movement back into the current price range. Also called a pullback as mentioned above. For bullish moves (higher-highs, higher-lows, etc.) the retracement is that price leg that goes back to the source of the recent/previous higher high before bouncing and heading back in the direction of the newly established trend.
A Reversal is a change in trend and can be found, using the example of moving from bullish to bearish price action. This can be seen after price makes a higher high and moves away price fails to take out the recent/prominent higher high and proceeds to fall below the last higher low.