Tuesday, February 10, 2015

When does a correction become a down trend

In any trend, even the strongest, a correction is as inevitable as 'death and taxes'. When Markets are moving up, at some point, they pause, consolidate and also move down. If we are confident that the primary trend is UP, then the down moves are considered to be corrective, which means that these moves will be shallower than the up move, terminating sooner than later.

However, for traders with a firm belief in the primary trend, a deepening of the correction starts raising questions on the validity of the primary trend itself. At what point does the correction start suggesting a change in trend?

Like most analysis in trading, there is no straightforward answer to this. A primary uptrend reflects a series of higher highs and higher lows. At some point the pattern is broken if the market is having a deep correction. When the pattern is broken, it is wise to step aside from buying, wait for the correction to be over.

Traders should not be in a hurry to call for a change in the primary trend. A long term trend can go through many corrections which will appear to have changed the main trend, but are actually just deep  retracements.

For investors, when you get a sense of a deep correction, step aside and suspend most of your buying. For traders, begin considering counter trend positions with smaller size and volume.

 

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