Method for determining correction

  • Sep 03 2021
  • by
  • Analyst AZA
Method for determining correction

Method for determining correction

 Trading on corrections is popular with scalping traders. The concept of a market correction or retracement represents the price movement in the opposite direction relative to the current trend, which is formed due to the overbought or oversold situation in the currency instrument (or the financial asset under consideration).

There are three variants of correction - upward, downward, and sideways. To correctly determine the correction in the forex market, you need to know the reasons for its occurrence. Among the main reasons are: - rapid changes in supply or demand; - minor events that cannot provoke the emergence of a new trend; -exit from the overbought or oversold area, which is just activated after a sharp change. Indeed, after the jump, the number of orders concerning the trend increases to critical values, then a rollback occurs, and after that, the movement continues (resumes).

The amount of correction is proportional to the increase in the value of the time interval. For example, for M1, the correction can be measured by only a few points, while on D1 it reaches hundreds. The ability to enter the market against the trend largely depends on the timeframe. Almost 70% of all price time on the Forex exchange is in a state of correction. This attracts many players to enter the market during this period. But for novice players who are poorly guided in the market mechanism, experts advise refraining from this. But a logical question arises: to what level can the correction develop? Consider the theory of Charles Doe. Back in the nineteenth century, an expert proposed: he recommended that the entire trend be divided into four parts.

Special lines were drawn along the boundaries of these parts - segments equal to one-third, half, and two-thirds. According to the scientist, the correction can go down to these levels. Then, Ralph Elliot suggested other levels - 38.2%, 50%, and 61.8%. The levels were offered according to the Fibonacci ruler and all lines practically coincide with each other. But what specific approaches should be used if a deviation from movement is not very well defined? In other words, it is completely unclear whether this is a reversal or a pullback.

Several techniques can be used that can be successfully deployed in a trending market. If at the moment of uncertainty, we «caught» the position, then we can try to keep it. But there are big risks that such actions can lead us to losses: likely, this will not be a market reversal, just a prolonged correction.

There is also an option that our position can be closed, and then try to re-enter the market, when the price indicators again continue to move at the already existing rate. But this situation is also unsafe: there is always a possibility of losing profit if the price at the moment (at the moment when the trader has already left the market) shows a jump. This threatens not only financial losses but also additional losses, such as the payment of the size of the spread. But by fixing a position in the direction of the trend, we again risk losing money: this is because, despite the forecasts, the market may reverse. But, of course, there is a chance to get a good income, based on what specific indicator we managed to get - low, or, on the contrary, very high.

The final result largely depends on what transactions we have made, and of course, how the market will develop further.



To correctly determine the correction in the forex market, you need to know the reasons for its occurrence.


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