What is correction

👉 What is correction?

👉 Trend v/s Correction

👉 Types of correction

👉 Chart Patterns in correction

👉 Fibonacci

👉 Moving averages in correction

👉 Time frame in correction

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What is a correction?

👉Any downmove in uptrend and upmove in downtrend is simply called as correction. Correction can be in the form of chart patterns. 

👉It can also be price wise correction, time wise correction or it can be complex correction. Correction in any form after a move in market is considered as healthy one till the certain point. 

👉Volitality plays a significant role in correction time and correction size. Some will think ideal correction can be 10%, 20%, 25%, etc but it varies to each stock. 

👉Some will also consider fibonacci numbers like 38%, 61.8%, 78% for the end of correction which is ideal and logical case. 

👉Many traders and investors feel fear of correction and enjoy the upmove but we have to bare both. Not to excite more in upmove and not to feel bad in correction. 

👉One should be always ready to bare the small corrections in stock market while investing.

👉An ideal correction takes place when the price and time both are properly involved. This means the stock or index has fallen down in uptrend and also consolidates at the end of correction. 

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Trend  v/s  correction 

Trend and correction both can be seen in price. Correction can be in the form of down move or bounce in a uptrend or downtrend respectively. As a simple analysis part no one can identify the top and bottom of price but the price can be timed efficiently. Finding a top cam be hectic part but to find the end of correction can be simple and effective with practice and experience. 

The earning or profit can be made only in trend not in correction. But the focus should be keep more on correction rather than trend. 

EXAMPLE :- 1

As you can see in the above chart in the big uptrend there is small corrections in between. The first correction is more time wise correction and the second one is price wise correction. By taking small healthy corrections price is moving up. 

EXAMPLE:- 2

This is second example of correction in uptrend. After a upmove price takes a correction. This is typical time wise correction. 

EXAMPLE :- 3

This is a example of correction in a downtrend. The first correction in a downtrend is a price wise correction and the second one is time wise correction. Both time wise and price wise corrections can be seen in an uptrend and downtrend too.

EXAMPLE :- 4

This is also a example of several corrections in a downtrend. All three are price wise corrections in a downtrend. 

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Types of correction

Correction is broadly divided into 2 parts :-

1. Price wise correction 

2. Time wise correction

The difference between price wise correction and time wise correction is discussed below. Both corrections starts after a trend but both are different in characteristics. Price wise correction also involves time in it and time wise correction also involves price in it. Ideal correction takes place where the time and price both have involved in a it.

1. Price wise correction 

The price wise correction name itself suggests that the price falls after the uptrend and bounce after the downtrend is clearly called the price wise correction. 

The reason behind the price wise correction can takes place due to many Global or country specific reasons. Eg. Covid 19 fall in world markets, 2008 leaman crisis, political instability, financial crisis, etc.

Price wise correction can be 10%, 20%, 30%, or fibonacci numbers retracement percentage. But the time has to be involved in the price wise correction.

As you can see the above chart in a big uptrend the first correction is time wise and the second one is price wise correction.

In a time wise correction if you compared low and high price has lower down but we will consider it as a time wise correction.

Another one is price wise correction but still time has involved in it.

In all of the above examples typical price wise corrections has been shown on the charts. The common thing in all of the charts that correction has been taken place after the trend. Price wise correction can also be a part of uptrend and downtrend both in the form of fall and bounce.

2. Time wise correction

Opposite of the price wise correction time wise correction involves more consolidation in a correction rather than price fall.

Mostly the flag patterns, range formation, consolidation between moving averages or in range mostly form a time wise correction. 

Time wise correction can takes place in both uptrend and downtrend. Sideways price movement is also a example of time wise correction. 

Time wise correction also involves price in it.

These are the few examples of proper time wise correction after a trend. 

All the above charts is the examples of typical time wise correction. All have formed a specific range in a long time but the price fall is very low. Rectangle pattern, flag formation, etc are some chart patterns of time wise correction. 

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CHART  PATTERNS  IN  CORRECTION

This is one of the most informative part of this correction article. 

The formation of any chart pattern takes place only ina correction. If the chart pattern has formed in a price this shows itself that the correction has taken place. 

Chart pattern forms only in a correction, trend does not have a pattern. Trend can go up or down in a form of uptrend or downtrend. Pattern formation is possible in any trend.

Correction can take place in a uptrend or in downtrend, chart pattern remain same in correction. 

Chart patterns can be reversal patterns, continuation patterns or can be both, but all chart patterns forms in a correction. 

Many of people in stock market who knows about the chart patterns in technical analysis, very less traders or investors notice this point about correction and chart pattern connection.

Chart patterns can end the correction or continue it to some more extent. 

These are some examples that chart pattern forms only in correction. 

Eg. 1

Above example is a typical example of head and shoulder chart pattern. In this case after a uptrend head and shoulder pattern forms and the Corrective phase starts after it.

This pattern has started a correction itself and extends correction too. This shows the head and shoulder pattern is correction in a uptrend. 

Same like this pattern double top, triple top, rising wedge, etc starts a correction and extends it too.

Eg. 2

Opposite like the head and shoulder, inverted head and shoulder pattern forms after or in a downtrend.

Inverted head and shoulder it is a correction but in downtrend. It also starts a new uptrend or correction in a downtrend.

Same like this pattern double bottom, triple bottom, falling wedge, etc starts a correction and extends it too.

Eg. 3

As we discussed earlier rectangle pattern is time wise correction pattern. 

It mainly forms a range for a stock and act as a start and end of correction in majority of the cases.

Eg. 4

Triangle pattern formation can take place after both uptrend and downtrend. Triangle may act as a continuation of trend or as reversal of trend. 

Breakout or breakdown in a triangle pattern can decide the next move of the price. 

The triangle pattern is itself a correction. It is combination of both time wise and price wise correction. 

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Fibonacci  retracement  and  extension

Fibonacci numbers forms by adding previous two numbers and forming the third number. 

Fibonacci numbers

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144......♾

Fibonacci retracement levels

23.6%, 38.2%, 50%, 61.8%, 78.6%.

Fibonacci numbers can be seen in nature in different forms. Growth in trees, human body structure, petals of flower, arm structure, etc

Fibonacci retracement can be used in stock market to identify the endpoint of correction in both uptrend as well as downtrend. It can used in time wise correction and price wise correction. 

Fibonacci retracement cannot be used in isolation it must be combined with price and some other indicators. 

Some examples of fibonacci retracements

Eg.1

In the above image correction has retraced at 38.2% of the total move of trend. Consolidation has formed at the bottom and previous uptrend continues after the correction. 

Eg. 2

This chart is a combination of both time as well as price wise correction. The low taken at the 50% is a bottom and consolidates after it.

Eg. 3

This is proper time wise correction and retracement at the 50% and consolidation happens after it.

Eg. 4, 5, 6, 7.

All the above charts is a example of retracement of correction compared to previous trend.

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Moving averages in correction

The use of moving average to identify correction is the most important part of this article. We have to use mean reversion and mean deviation in finance to identify the ending point of correction. This helps to maximum profit from the point and low stop loss area for a buyer as well as seller. 

Mean deviation means the price move far from the moving averages and the distance between the mean goes on increasing in a trending move. In a both uptrend as well as in a downtrend price deviates from its mean and gap goes on increasing till the start of correction. 

Opposite of the mean deviation, mean reversion decreases the gap between price and moving averages. Mean reversion starts at the starting point of correction and gap keeps on decreasing till the meet of moving average and price.

In the above chart moving averages keep going far from price in a trending phase.

At the start of correction gap between moving average and price is too big and the Corrective phase starts.

Finding a top is almost next to impossible task for a trader or investor. But finding the end of correction is much simple as compared to identifying top.

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Time frame in correction

Time frame in correction is important for anyone to time the correction. 

More in detail discussed on FINANCE FAMILY YouTube channel

YouTube video of correction 

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