A person who has ever observed the stock market, he will agree that this market never moves in a linear way. If it is up a day then it may be down the next day. When we talk about this market as a whole then we come to know that this market actually moves in trends. Trends means that for a certain period it will move in a single direction and within that trend there will be the periods then this market will move in the opposite direction of the existing trend. Such shifts are regarded as Correction.
Actually corrections are a time being reversal of a trend although they work parallel to the previous trend. These corrections do not represent a new trend until they remain the corrections. Corrections are normally considered as a normalization of price in any direction.
A stock market correction occurs when the people investing money and speculators of the stock market drive a trend of profit making. Money investors try to compare the reward and risk checks and understand the feasibility of a certain position. When a trend reaches at its peak point then the risk gets higher than the reward. So, at this time correction helps to keep the balance towards reward and it helps in maintaining the prices too.
In mostly observed cases, an individual stock will utilize the corrections to maintain the resistance level. It can be a last price point that had served as a bottom or a top point in a trend. So in more obvious terms the ownership of share will get changed and the share will shift from the short term investor to the long term investor. This process is known as shifting of power from weak investors to strong investors.
Corrections are also known as the retracements. One technical strategy is that pays attention on checking that to what extent the corrections retrace the trends in order to measure the success. The minor correction have the ability to retrace the one third of a previous trend and when it is talked about the major corrections, they can retrace the two third of a previous trend actually. Fifty percent retracements are meant to differentiate between the major and the minor corrections. A retracement that covers the three quarters of a previous trend it is known as deep correction and any retracement that covers more than this, it strongly suggests the beginning of a new trend.
5. Time frame:
Corrections can be evaluated too in the context of their time frame. This evaluation is done with the help of the ratios. Retracements that are low in price always tend to last for a long time. On the other hand, the retracements that are deep in prices they tend to happen fast. It is a view that the shallow directions that are for a very short duration will not be considered as corrections at all.
So, this article gives us a clear idea that what a stock market correction is.