How To Use Market Correction Strategy

May 3, 2013
By Vlad Karpel

When used effectively, traders can earn huge amount of profits at such a short window of time. When a distinctive market gap is spotted due to the overbuying or overselling of an a given security, a sudden and strong rise or fall in the price normally follows. This phenomenon is known as “the market correcting itself” or market correction. So, once a distinctive gap has been identified and the alert trader opened a position at the right time, the market will conspire with to move such that the trader will ultimately profit. This means that the risk of losing from the trade or not make any profit is relatively minimal. In fact, on the average, the correction strategy has been known to elicit an 85% success rate.

However, market corrections occur very rarely that in an entire year, market corrections may only happen a few times. Moreover, market corrections are hard to predict. Oftentimes, market corrections are spotted when they are already happening. For example, as Forex does not close except over the weekend, gaps are much rarer events. In fact, there is only one time when a correction strategy is possible, which is when Forex re-opens late Sunday afternoon. It is also worth noting that market correction opportunities are really easy to miss. Failing to spot a market correction opportunity as soon as one appears and subsequently open a strategic position at the right moment will simply equate to a lost opportunity.

How To Perform Correction Strategy

To perform the correction strategy, a trader should regularly follow market news and monitor the charts closely. Monitoring price movements is quite a tedious but necessary job. Also, if the distinctive market correction is spotted right before the closing weekend, it is appropriate that a trader should perform a fundamental analysis as a form of validation and to serve as basis for executing the most strategic position possible. A market correction price movement is usually characterized by the chart below.

Correction strategies are highly effective and profitable, they are rare, easy to miss and may demand much time and effort from traders. However, traders should still learn how and when to use this strategy just in case it may come handy in the future. As a solution to the problem of missing market correction opportunities, traders may always subscribe for alerts from their brokers or from their trading signals providers should they want to informed about those things immediately.

Correction strategies are fairly straightforward. Once a distinctive market gap indicates a market correction opportunity, all you need to do is buy a put option if the expected corrective action is downwards or buy a call option if the expected corrective action is upwards. This type of strategy can only be used when a distinctive market gap is spotted. However, sometimes market gaps may be deceiving. A trader may fall short if he opens a position immediately right before the market gap continues to widen. To be sure, it is recommended that you wait until you can clearly identify a candlestick confirming that the price is now moving back in the original direction of the gap. Market corrections don’t last for a long time. As such, only short-time frames are applicable for this strategy.

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