The corrected mistakes

Most of traders use the expression “correction”, The question is what are those mistakes should be corrected?

“Correction” in trading usually means a chart pattern in which price stops moving in its previous direction and goes the opposite direction for a short distance and a short time. Usually the original movement is seen as having been too fast and too powerful, and sometimes this is called over-bought (if price has been rising) and over-sold (if price has been falling). The idea is that the “correction” reduces the speed and power of the original movement but does not reverse its direction - after the correction, price continues in the original direction.

e.g. USD/JPY last summer had been rising strongly. Price accelerated in the second week of July, and this was followed by a major correction downwards. However, price resumed the original direction in late August and price continued to rise.

Corrections are often good value places to enter a trend, as the trader can open a trend-following position at discounted prices to where the trend recently reached. Its not normally a good idea to chase price.

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thanks for your nice post…

Wouldn’t it also be a handy excuse for price movement that’s not been taken into consideration? I also see this term a lot for the stock market but sometimes I feel they use it to not make it sound too dramatic?

What are some factors that contribute to a “correction”?

There isn’t really any way to be 100% sure that a rising price in an uptrend has finished rising or a falling price in a downtrend has finished falling. But the most likely next thing that happens in a trend is that the trend continues.

So if price goes through 70, 80, 90, 100, to 110, then falls back to 105, its probably in the very near future going to go back to 110 and then on to 120. So buying at 105 is a nice discount to the latest high price 110. In practice, you can reduce risk by not buying at 105 but by setting a buy order at say 106 or 107, so that you will only be long after price has already proven it is being driven higher again.

Almost all trends have corrections, they never move in straight lines upwards or downwards. The longer the time since the last correction, the more likely the next correction is to occur. Sometimes the time intervals are very regular. A correction becomes quickly more likely if price suddenly accelerates beyond a slow smooth trend.

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Thanks for your nice post.

So it’s a matter of looking at the long term trend and then seeing the small “deviations” as corrections. Did I get that right? But does it have to be small all the time though? From your example it didn’t go back down to 80 for instance. If it did, would that still be considered a correction? I suppose that would be considered a “crash”?

Its not a mathematical relationship. To say price is in an uptrend you need to look at more than whether price has risen.

But if price did go as far down as 80, then probably most or all the TA features that had been saying price was in an uptrend probably all turned to say it was now in a downtrend. Or at least most of them had weakened sufficiently to say that the uptrend was finished (for now).

Ah so any bigger and the trend would have already changed. :thinking:

Or at least be now a less positive trend to be trading compared to other trends in forex.

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@ponponwei Not necessarily. When a trend gets very strong volatility can go up massively. Corrections or spikes against the trend can be massive. The trend can still post more extreme prices.
Generally people wait for confirmation before deciding that a trend is over. Typically in a very lagging fashion. Heck even then it could still be a correction.
You’ve got to view the trend within the larger context. Intra day trends and larger trends.
There’s nothing certain.
Typically you can only be sure that a correction is a correction when the trend continues. But that’s very lagging too. So you’ve got to put your bet on with risk management. Either early and aggressive or waiting for trend resumption.

It’s a handy excuse for people holding the bag and hoping that it’s just a correction. "I’ll get out when I’m even"
Oh the horrors.
No edge can withstand such large losses

Most of us have our own criteria for how we believe a trend ends. But I think it’s fair to say it’s over when it stops posting more extreme prices

Yeah I definitely understand what you’re saying but that sounds like a skill I do not yet have. For a while now I’ve just been going with the trend but for major pairs, I’ve been able (only twice though) to pick tops and bottoms.

You can try to do that if you want. Will be less error prone if you make your decisions as late as possible. You have more info then.
Nobody can pick tops and bottoms consistently.
The market changes as it moves. You can’t know if it’s a top because even the market doesn’t know. At least that’s how I view it in my head. Not sure if others agree.
Read Mark Douglas - Trading in the zone

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I’d like to add to the conversation that understanding how and where buying and selling pressure comes from, as well as when trends are losing momentum and getting exhausted along with volume/market profile, can greatly help you in your decision making and identifying what stage a trend is in and if there maybe a correction/pullback looming.

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