Trend Corrections in Forex Market
A trend correction is a brief price movement that runs against the current trend and lasts for a very short time. Although the price’s primary direction remains unchanged, some movement in the opposite way develops, causing correction. A correction is also known as a pullback in forex; Pullbacks can be modest and common or big and uncommon.
Depending on the time, the scenario might be different. If there is a positive trend such as on the Daily chart, and you flip to the hourly chart of the same currency pair, you will see that there has already been a correction; the price briefly falls.
Factors behind Trend Correction
Corrections are frequently the result of profit-taking. Consider a scenario where traders are buying the asset in big quantities during a positive trend. After the price hit a significant level, traders started to close their buy positions in order to achieve profits. Practically, when you end long positions, there is a sell-off. As a result of the pressure from much more selling, the price drops, and a pullback happens.
A trend correction can also happen after a significant price increase because of the same reason – profit taking. Traders take advantage of the increase and close positions. Stop-loss hitting is also a common reason for pullbacks. There will be a brief market movement against the current trend if a significant number of stop losses hit at a given level. Before breaking major news, stop. Traders might cancel positions before economic data or other information that may change their decision to purchase now or sell later.
Pullbacks can also be related to a temporary shift in market sentiment. The ratio of buyers to sellers in the market will frequently alter for a short time under the effect of the same news or other circumstances. There can be more sellers in the near future if the trend is positive. On the other hand, if the market is negative, buyers may occasionally seize the initiative. It results in a pullback, a short-term counter-trend action.
Distinguish between a pullback and a trend change
How to distinguish between a pullback and a trend change is a concern shared by all traders. Nobody can predict with certainty where the price will go at any given time. Or when the trend will cease, when it reverses, etc. All we can do is guess at probability and make assumptions.
Pullbacks or corrections are very common, and any investor may experience them occasionally during their financial career, frequently more than once over the course of a decade.
Let’s take an example of a simple Daily Chart. What is the chance that the trend on the daily chart will change? Extremely low, as the weather on such long-time scales is already determined by basic variables, such as the political and economic climate of the nation whose currency we trade. The speculative element is essentially levelled here. Therefore, rather than the short-term balance of power between buyers and sellers, trends vary with changes in macroeconomic and political circumstances in the long term.
To conclude, the trends tend to change more often in the short timeframe than in the longer timeframe. Usually, the speculations prevailing in the market and daily news or economic data are the factors behind the volatility in trends and price movements. The chances of a trend change in a longer timeframe are less because factors impacting the prices had already impacted the market.