What is correction (Correction) in cryptocurrencies?
A correction is a temporary decline in the price of the cryptocurrency that occurs within the overall market trend. This decline is not considered a reversal in trend, but rather a pause or temporary stop for the price before continuing its path, whether upward or downward.
Types of correction: Downward and upward
First: Downward correction (Bearish Correction)
It occurs when the market is in an upward trend, then the price temporarily retreats downward. This type of correction often results from profit-taking by traders or as a result of reaching a strong resistance area. A downward correction does not change the overall trend, but it gives new traders an opportunity to enter at lower prices.
An example of this: If a currency rises from 1.00 to 2.00 dollars, then drops to 1.70 dollars, this decline is called a "downward correction" as long as the main peaks and supports are not broken.
Second: Upward correction (Bullish Correction)
It occurs when the market is in a downward trend, then the price temporarily rises before resuming the drop. This type of correction is often the result of covering short positions or short-term rumors. Although the price rises at this stage, the overall trend remains downward.
Example: If a currency drops from 2.00 to 1.00, then rises to 1.20, this is a temporary rise considered a bullish correction within a downward trend.
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Why does correction happen?
The reasons for correction vary depending on the nature of the market, but some of the most famous are:
• Profit Taking: When the price reaches high levels, traders start selling to lock in profits.
• Market saturation (Overbought / Oversold): When indicators like RSI reach saturation areas, the price starts to correct to release momentum.
• Surprising news or rumors: They may affect investor confidence and lead to a rapid corrective movement.
• Important technical levels: such as strong resistances and supports, which can lead to temporary price reversals.
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Does correction mean a reversal of the trend?
Not necessarily.
A correction is a temporary movement against the primary trend. If the trend is upward, the correction is a temporary downward one, and if the trend is downward, the correction is a temporary upward one.
But if the correction continues and turns into a break of important peaks or troughs, it could be the beginning of a reversal of the overall trend.
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How can you benefit from the correction?
Corrections represent important opportunities for smart traders:
• Buying during the downward correction: In upward trends, one can enter after the correction ends to take advantage of lower prices.
• Selling during the upward correction: In downward trends, one can sell after the correction ends to profit from the upcoming drop.
• Waiting for confirmation of the rebound: It is better not to enter directly at the time of correction, but to wait for confirmation signals such as reversal candles or a bounce from a support or resistance level.
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How do we calculate the price correction?
Simply put, a correction is the percentage of retracement from the last strong movement.
Example:
A currency rose from 100 to 150 dollars, then dropped to 135 dollars.
We calculate the correction as follows:
150 minus 135 = 15
Then we divide 15 by (150 minus 100) = 50
This means 15 ÷ 50 = 0.30 or 30%
This means the price corrected by 30% from the upward wave, and this is normal in the market before continuing the trend.
We often use tools like Fibonacci to identify potential correction areas (23.6% - 38.2% - 50% - 61.8%)
