Trend or correction. How to distinguish a trend reversal from a correction?

They say that you need to trade in the direction of the trend, and during the correction – wait for its end, and the main question is “how to distinguish one from the other?” No. The main question is “is it possible to distinguish one from the other?” This article may completely turn your eyes on the price chart.

Good day to all! If you are interested in the topic of this article – most likely, you are already embarrassed by the attempts to distinguish one from the other, because by no means can you determine what is happening on the market now. I would also venture to suggest that you have already studied a certain amount of theory on the subject of Forex trading, or even tried to conclude your first transactions, but … After some time, SOMEthing went wrong 🙂

You went up the trend (everything is clear, the highs increase the lows – too. It’s clear that the price is rising), but as soon as you buy, the price for some reason right there (or not right away – to anyone as lucky) turns against you. The logical logical conclusion that arises in the trader’s head (I, of course, don’t know for sure and mainly judge by myself), usually something like this: “I guess I DIDN’t determine the trend that way”. Yes?

This article is dedicated to everyone who wants to always follow the trend, who argues in forums or in special trading chats on the topic of “buy” now or “sell”, as well as those who have already tried a hundred times to answer rhetorical (!) the trading question is “trend or correction”, and even after several successful attempts, sooner or later it was still wrong.

What are the trend and corrections?

Let’s abstract from the chart and try to imagine the change in the price of an asset simply in numbers. For example, EUR / USD at the end of the day on Monday was 1.15, on Tuesday 1.17, on Wednesday 1.16, on Thursday 1.18. Imagine in the form of a plate:

Monday – 1.15

Tuesday – 1.17

Wednesday – 1.16

Thursday – 1.18

Friday -?

Looking at these numbers and NOT PRESENTING the chart in your mind, try to answer your own question: how much will EUR / USD cost on Friday? Will increase? And why? Because the price was rising before that? And if it rained yesterday, does that mean it will rain today? Good. Someone will probably answer that the price will fall. Why will it fall? Because it has been growing for a long time? And if it rained yesterday, does it mean that there will be sunny today?

I lead to how our mind works at the initial stage of becoming a trader: we, as it were, “continue into the future” what we had before.

And note: we are trying to predict the future based on the past, forgetting about what the market is all about. And the market is a cluster of people, each of which has its own forecast for the future, and, as a result, people’s decisions in the same situation will be DIFFERENT. How to determine who will be more in a minute – buyers or sellers? How to determine which brand of car will turn around the corner? =) But, of course, this is where we are laughing at trying to guess the future, and then you will have a graph in front of the monitor, and your mind will again switch to “correction trends” and will create an ILLUSION of understanding where the price will go now.

Our mind at the initial stage is trying to guess the future based on what it was before. In a weather forecast, it would look like this: “If it rained yesterday, then it will rain today” or “if it rained yesterday, then today it will no longer rain.”

There is nothing wrong with this, this is a standard moment, and sooner or later it becomes obvious.

Now let’s figure out what the concepts of “trend” and “correction” are inherent.

“Trend” and “correction” is just a DESCRIPTION of what is happening on the price chart. Just a description of the situation, such as “it’s raining now.” In itself, it is devoid of predictive value.

The “trend” is usually called the larger price movement, and the “correction” – (and this is important here, just try to understand it) is less at the time when we look at the chart. Not at all! Namely, at the moment when we look at the chart! After all, this “correction” can continue and then it will already become a “trend”.

But if it is more or less clear with the rain that it is now raining, and after 5 minutes it is not known what will happen, then the “trend correction” is not a simple description, but with a hint that we like “know what will happen”. It’s just that everyone read that “the probability of the continuation of the trend (!!) is higher than the probability of its change,” and here in our brains there is a funny association of the word “trend” with predictions of the future. Trend, as it were, implies that you need to trade in its direction and correction – that you need to wait for a reversal “in the direction of the trend” and then go. I’m writing this, but it’s funny for me, because I remember myself and those moments that I was sad because I felt dumb, because I couldn’t manage to enter in such a way that after my entry the price would often go “where it should”, and as I regularly tried to understand ”

So, if instead of the concept of “trend” we use, for example, the concept of “momentum”, then perception immediately changes – it seems like there is already no particular confidence in the CONTINUATION of the further movement, is it? Although the situation on the chart is the same.

Absolutely the same with the correction – it’s just some price movement in the opposite direction of the “trend”, which is currently (!) Smaller in size. But what will happen in the future? Who knows =)

A rather ridiculous moment is that even if you don’t have a deal open, but you tell someone that “it’s the trend right now” or “it’s the correction right now”, you will VERY WANTED internally to make you right, even if you A little earlier they agreed with what I wrote about the IMPOSSIBILITY and NONSENSE of the forecast. Try an experiment if you do not believe it. Why is that? Where does this desire come from? I have an answer, but it will be better for you if you find it yourself.

Leave a Reply

Your email address will not be published. Required fields are marked *

Solve : *
27 ⁄ 3 =