Trading Technical Corrections : NobleTrading Blog

Friday, October 9, 2009

Trading Technical Corrections

Technical corrections are common market phenomena in which the price of a stock (or any other instrument) sharply declines (often to the next short-term support level), and often stocks are revalued with respect to their performances and market expectations. Most technical corrections last for a short-period, the original bullish trend is expected to continue, and thus is considered a very good buying opportunity. However, trading in technical corrections is a very risky strategy because of unpredictability of market movements.

Short and steep technical corrections can be considered good buying opportunities; but trading in long and steady corrections is much more risky. This is because with time, the price of the stocks holding decreases, trading expenses (per share) increase, chances of sharp market recoveries diminish, the cash-flow slows-down, and portfolio allocation and goals can change. The short and steep corrections are also not that much easy, the trader should have good market knowledge, access to info resources and enough experience to time his trades.

Although you are trading a short-term correction, prepare for long-term ones—plans for right stop-losses, ways to reduce trading expenses, ways to increase your money-flow, and hedging of risks are needed.
Buy slowly till the correction continues.
Stick to the basics – right portfolio allocation, no greed, right risk management, move with the market (avoid predicting it).
Understand market history, support and resistance levels.
Concentrate more on value stocks. This can reduce the risk.