They say, you must trade in the trend direction, and, during the correction, you should wait until it ends, and the key matter is “how to know one from the other?” No. The key matter is “can you know one from the other?” This article may completely change your view on the price chart.

Hello, everybody! If you are interested in this article, you are likely to be sick and tired of trying to know one from the other as you never can find out the real market situation. I can also assume that you have studied a certain number of theories on Forex trading and even tried to enter your first trades, but... at some point, SOMETHING WENT WRONG :)

You entered in the uptrend (everything is clear, highs are getting higher, lows are rising as well. The price is clearly rising), but as soon as you buy, the price somehow immediately (or some time later, if you are lucky enough) reverses against you. Natural logical conclusion, coming up to a trader’s mind (Of course, I can’t say for sure and tell generally about myself) usually, looks like this: “I must have identified the trend INCORRECTLY”. Right?

Trend vs. correction. How to distinguish the trend reversal from the correction?

The article is devoted to all of those who want to always enter in the trend, who argues on the forums or topical trader chats about whether they need to “buy” now or to “sell”; as well as to those, who have hundred of times tried to answer the trader rhetorical (!) question “either trend or correction”, and, after even a few successful tries, have still been mistaken.

What is trend and correction?

Let’s set the chart aside and try to imagine the price changes for an asset just in figures. For example, EUR/USD cost 1.15 at the end of Monday, on Tuesday, the value was 1.17, on Wednesday, 1.16, on Thursday, 1.18. Let’s present in the form of a table:

Monday - 1.15

Tuesday - 1.17

Wednesday - 1.16

Thursday - 1.18

Friday - ?

Looking at the figures, WITHOUT PROJECTING the chart in your mind, try to answer the question: what will be EUR/USD price on Friday? Will it rise? But why? Because it has been rising so far? But what if it rained yesterday, should it be raining today? Well, somebody may answer that the price will fall. Why will it fall? Because it has been growing for a long time? But what if it rained yesterday, should it be sunny today?

I’m driving at the idea of how our mind thinks at the beginning of trading: we a kind of “project into the future” something that has been before.

Trend vs. correction. How to distinguish the trend reversal from the correction?

Besides, note: we are trying to predict the future, based on the past, forgetting about what, in fact, is the market. The market is a crowd of people, and each of them has their OWN projection for the future, and so, their decisions in the same situation will be DIFFERENT. How can you find out, who will be more numerous in a minute – buyers or sellers? How can you identify what model of the car will come up around the corner? =) Of course, now, we are laughing at the tries to guess the future, but then, in front of your computer screen you will see the chart and you mind will AGAIN switch to the “trend-correction” and will create an ILLUSION that you understand where the price will move now.

At first, our mind tries to predict the future, based on what was before. In the weather forecast it would look like: “If it rained yesterday, it should be raining today” or “if it rained yesterday, it should be sunny today”.

It is not so bad; it is a common moment that will be clear sooner or later.

Now, let’s try to understand what, in fact, mean the notions of “trend” and “correction”.

Trend vs. correction. How to distinguish the trend reversal from the correction?

Trend vs. correction. How to distinguish the trend reversal from the correction?

“Trend” and “Correction” are a kind of DESCRIPTION of the situation on the price chart. Just a description of a situation, like, for example, “it is raining now”. Alone, it means nothing for a forecast.

“Trend” usually means a stronger price move, and “correction” (it is important that you understand it) is not so strong at the moment when we are looking at the chart.. Not always! Just right at the moment, when we are looking at the chart. But this “correction” can extend and then, it becomes the “trend”.

Trend vs. correction. How to distinguish the trend reversal from the correction?

If it is more or less clear with the rain; that it is raining now, and nobody knows what will be in five minutes, then “trend-correction” is not a simple description, it suggests that we a kind of “know what will be”. Everybody has read that “the trend (!!) is more likely to continue than to reverse”, so we all have a funny association of the word “trend” with predicting the future in our minds.

“Trend” somehow suggests that one should trade in its direction, and the correction means that one should wait until the price reverses “in the trend direction” and open a position after that. While I am writing all this, it makes me laugh, for I remember myself at the moments when I was upset because I felt to be stupid as always failed trying to enter so that the price would more often go “in the needed direction”; and how I regularly tried to understand “What am I doing wrong?” Just like a person who is looking out of the window and trying to guess, who will come around the corner, a boy or a girl. And they have been right a few times, and then they are wrong and get upset, like: “What on earth is that! WHAT haven’t I taken into account this time?” Sorry, I’ve been distracted, but my case is really funny, as I was mad trying very hard to consider and capture everything.

Well, if, instead of the “trend” notion, you use, for example the word “momentum”, you will think differently. You are not that confident that the move WILL CONTINUE, aren’t you? Though, the situation in the chart is the same.

The same is true for the correction; it is just a certain price move in the direction, opposite of the trend, which is at the moment (!) is smaller in size. What will be in future? Who knows=)

It is quite remarkable that if you don’t even open a position but you tell somebody that “it is certainly the trend now” or “it is certainly a correction now”, you will have a STRONG WISH inside to be right; even if you’ve agreed earlier with everything I wrote about impossibility and senselessness of any predictions. Try to carry out an experiment, if you don’t believe. Why is it so? Why do you feel this wish? I know the answer, but it would be better for you if find it by yourself.

Why you need to identify “trend” and “correction”

Let’s move on to practice. The key matter is that you must understand and admit the fact that traders do not predict the price next moves. Good traders are not those who’ve learnt tricky complicated approaches, suggesting the future price moves (it is surprising, as everybody thinks this way at first). Good traders are those, who increase their deposits as a result of 100 trades.

To my mind, every beginner analyzes the chart like this:

Trend vs. correction. How to distinguish the trend reversal from the correction?

A more experienced trader analyzes the chart like this:

Trend vs. correction. How to distinguish the trend reversal from the correction?

Do you see the difference? The first approach is associated with the wish to predict the price. It includes some expectation, a kind of formula “if...then...” and imagines the further price move. In the second case, you just have an entry point with predetermined (!) exit points – with a loss, or a profit. Why not only with the profit, if the trader is advanced? :) Because good traders understand that, in each trade, there are two scenarios - the price can go up, and it can down as well, or “Take profit can work out, or stop loss can work out either”. However, a good trader has undertaken a study and has come to a conclusion that, according to the results of 100 trades, 55 of them close with a profit, and 45 ones – with a loss, and summing up the result...What? As a result, their deposit increases after 100 trades.

The key matter is that you must understand and admit the fact that traders are not to predict the price next moves; rather, they are to develop a system, yielding a positive outcome, as a result of 100, for example, trades.

You may be scared, I agree. What guarantee is that this ratio won’t change in future? What guarantee is that you will be rewarded, if you agree and strictly and regularly follow your system, without getting depressed if the price goes against you in a certain trade? Where is the guarantee that the next trade will be profitable? Who can guarantee that you will have profitable trades at all?

That is the problem at first. The right traders are not logic. They seem absurd to beginners, as they can’t find any reasoning; however, good traders trade exactly tin this way. A certain difficulty is in the “probabilistic thinking” (when you are satisfied with 60% profitable trades, and not with 100%, and you don’t worry). A beginner trader can’t understand how it can be so that the SAME market situation generates profits in 6 cases out of 10, and brings losses in 4 cases. It is just madness, isn’t it? Imagine that in your everyday life you put some food into the microwave oven, and in 6 cases out of 10, it warms up, but in 4 cases, it blows up (as well as the microwave). Doesn’t sound good, does it? And what will you do if your food blows up with the microwave (even for the first time)? You will LOOK FOR the DEFECT – why, for what reason, your microwave oven, seventh time, didn’t warm up your food but blew up. Apparently, something went wrong. And what do traders in the market do when their stop loss orders work out? Do you see now? Only, in the case with the microwave, you can find the defect, but you can’t in the market. It is because a microwave’s structure doesn’t change, but the market situation can change any moment.

We are just used to “perfectionism thinking”, that is to address the “bad” and look for its causes, “improve”, “understand the reasons for failures” and so on. It’s natural, it is not that bad; and it is a common difficulty of beginner traders – to change your thinking to the “probabilistic”, when you don’t have to be always a perfect trader, rather, you need to seek a GENERAL positive outcome and improve it all the time, knowing that the PERFECTION CAN’T BE ACHIEVED.

Trend vs. correction. How to distinguish the trend reversal from the correction?

I’ll try to explain, but, again, the matter is how quickly you can switch from “improving” to “analyzing a series of trades”.

I’ll explain in football terms. Football players practice a certain combination 100 times at the training. Each time, they see some new features of this combination, a kind of “feel” each other better, passes are getting more accurate; and, in some time, they become confident (based only on the experience, they can’t VERBALLY transmit it to anyone, or persuade that this combination really works). When they come to the football pitch with real opponents, they have no guarantee that this combination will always work.

However, the better they practice it, the MORE TIMES they practice it, the more skillful these football players are. And the longer they play football in general, the more perfectly this combination will work and the higher the PROBABILITY of its success will be.

Note that they won’t guess where the opponents are going to run (you can watch how footballers from any top team play), they don’t “adjust” themselves to the opponents; all combinations are done as if “mechanically”, because they were practiced 1000 times before, players just don’t reflect or forecast, don’t think about “the guarantees of success” and so on.

Do you see? These people just KNOW what to do, because they practiced it hundreds of times, and they have the confidence in success that is NOT BASED on their knowledge of the future. They only know that, even if not this time, the next one, or the one after next, they will certainly succeed. Though, in terms of predicting the future, it is completely unreasonable =)

Instead of a conclusion, I’d like to emphasize that the most difficult is to persuade yourself to start practicing without any belief or hope that you will develop your own trading system. Nobody (!) at first has self-confidence; therefore they’d like to find something complete and profitable, to buy advisers, promising 1000% yield a day, and to trust the experts on the forum. So, if you manage to overcome yourself, if you don’t give up after a series of losses, you will finally trade better and better, and your skills will be growing more and more prominent. I truly wish all of you success in trading; and I sincerely hope you all achieve this point.

Trend vs. correction. How to distinguish the trend reversal from the correction?

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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