What is Market Correction and its purpose?
Market corrections are occurrences wherein an asset's value has exceeded its base value, signaling investors to often sell their assets for profit, further leading the value to lower down back to its base value and upwards again, in accordance with the market’s trend.
Market corrections tend to take place in uptrend markets, wherein prices can fall by 10% within an hour.
An illustration would be the uptrend market in 2017, which experienced five market corrections, devaluing values up to 30-40%.
The three main factors that lead to market corrections are selling for profit, technical analysis and news.
1. Selling for profit refers to when an investor sees fit that they should sell portions of their assets for profit gains, in the hopes of buying it again when it is at a more reasonable price point.
2. Technical analysis investors, for example, tend to predict where prices would rise up to, reverse back and display a repeated pattern. Such groups can be influential as they can be found to sell their assets when a TA signal is indicated, causing an immediate market response.
3. News and information can be a crucial factor in markets, especially in cryptocurrency, where even the slightest of bad news can lead to immense market corrections and volatility as investors could be alarmed by sudden changes in the market, like responsive asset sales.
Effects of Market Correction
Investors new to the market often view market corrections to have negative effects, but in reality, they can help reduce volatility and slow things down, while also giving investors the chance to buy assets as well.
However, with immediate market corrections come panic sales, which can further lead to losses.
What you should do
Understanding the concept of market corrections is a good start. It is often found that investors can be emotionally affected by them, leading to fear that they’d made wrongful decisions when investing.
Secondly, when facing market corrections, it is important to be alert, but not alarmed, while also conducting strategic investment methods to avoid and manage risks that may occur.