Greetings to the readers of this resource and trading colleagues. Today we will talk about corrective movements in the market. We often we use corrective movements in the trading process. Although the market, at first glance, seems to us to be chaotic, many processes and movements are quite natural. Most completed movements can be described as a percentage. If you look at the historical part of the chart, you can see that the price does not move in a straight line. The trajectory of the price movement consists of many waves. If there is an upward movement, then it is necessary, after it, a downward movement begins. If the prevailing trend in the market is upward, then the upward waves will be longer than the downward waves. In a downtrend, accordingly, the picture will look mirrored.
Trend and flat
Directional price movement is a trend. Moreover, any price movement can be decomposed into many mini-trends. We see a pronounced uptrend on the daily timeframe. And having switched to a shorter time interval, we can see the lateral movement. We call this phenomenon flat. The price moves, as it were, in a certain corridor with a small range. And if we look at one-minute charts, we can see a downtrend. This downward movement occurs within the flat on the hourly chart and may be a corrective pullback on the D1 chart. An upward sharp impulse is usually replaced by a downward pullback or flat. In most cases, a shallow corrective pullback occurs, at the end of which a flat may form.
Market movements can be of different lengths, different durations and different intensities. In order not to be confused in units of measurement, the length of corrective movements is usually measured as a percentage. As a percentage of the impulse wavelength. The depth of the correction can depend on many factors. This can be the speed of price movement, the general slope of the trend, news background. Typically, a rollback occurs to a depth of 50% of the original movement. That is, half of the already completed movement towards the mainstream. But very often the correction can end at 38.2% or 61.8%. It is convenient to make all measurements using the Fibonacci Grid tool, which is available in every terminal. Also, the depth of the corrective pullback can be influenced by strong levels on the left side of the chart. This point must be taken into account when making trading decisions.
Using corrective movements
Knowing the principle of price movement, you can use rollbacks in your trading. Some traders, when reversal patterns appear at the end of an impulse, open deals in the opposite direction. This is counter-trend trading. Knowing the range of the corrective pullback, stops and targets are set. This is a rather risky business. You can use pullbacks to open trades in the direction of momentum at a profitable price. Trading in the direction of the trend is much safer and more profitable. Also, you need to take into account the slope of the trend. The steeper the price movement, the faster it can end. If the trend trajectory is flat, there is a chance that the trend movement will change soon. It can be either a reversal or a sideways transition (flat). The most reliable trend is a trend with a slope of about 45 degrees. No matter how the market situation develops, you should always remember about proper capital management.
March 31, 2021