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Correction, pullback, retracement, consolidation — are they all the same?Now that the Bitcoin is growing again (well, sort of) we hear the word “correction” a lot. This is one of the first terms that a beginner trader has to learn, together with “uptrend” and “downtrend”. But you might be wondering: are correction and retracement the same thing? Are they bad? And what about consolidation?
Welcome to post no. 2 in our trading basics series (see episode 1 here (
https://medium.com/@smmonex/technical-vs-fundamental-analysis-the-basics-e2c7f2ae616a ). Today we’ll look at corrections — a natural element of any uptrend. That’s right: even during the strongest uptrend the price cannot keep going up all the time. Every once in a while, it will fall a little bit — and then start growing again. Let’s see why it happens and how it’s different from a consolidation.
🔵Why a correction is a good thingFirst, let’s clarify one thing: correction, retracement and pullback are three names for the SAME THING. So don’t be alarmed when you see them in articles about trading.
Correction is a temporary decrease in price that happens during an uptrend. It’s corrections that help form that characteristic patterns of peaks and troughs.
In this image, look at the period between May and June. The price trend is clearly upwards, but after every swing high there is a drop. The important thing to note is that every new peak is higher than the previous one — and every new low is higher than the previous one, too. It’s the essence of correction: swing highs and swing lows keep becoming higher.
Corrections happen because some traders decide to take profits. Imagine that you bought BTC at $9000, and now the price is $10500. Some will wait for it to grow further, but some will be happy with the earnings and just sell their BTC back for USD. That short-term swell of sell orders creates a price drop.
A correction is a good opportunity to buy — as long as you are sure that the trend will continue. Look at mid-June on the chart: after the highest peak and a trough, the next peak is not as high, and the next trough is lower than the previous one. This means a reversal, not a correction. However, it wasn’t immediately clear. You only know that a correction has happened once it’s confirmed — that is, once the price starts growing again and passes a new, even higher peak. (There are other indicators that a specific drop is a correction, such as it touching a moving average line… but we’ll get to it in our future posts).
Here’s the main takeaway: corrections are normal — if price keeps growing without any troughs, then there’s something very suspicious going on, like a bubble leading to a crash. Trend traders buy during corrections, because then the price grows even higher.
🔵Consolidation — not so goodLook at the right part of following chart and note how the price keeps oscillating within a range, seemingly uncertain which way to go. This is consolidation:
Consolidation is not a good time for traders, because the price action is random. Successful trading is all about predicting how the price will change, after all. A consolidation usually lasts less than four weeks, but it can drag on for months, too.
It’s important to remember that your idea of correction, reversal and consolidation depends on your time frame. If you are in the game for the long term, then a correction that lasts several days won’t bother you. However, for a day trader the same price drop is a reversal of the trend.
Many experts believe that Bitcoin has now entered a consolidation stage before a new spur of growth. We’ll soon know if it’s true — remember, in the crypto trading it’s all about predictions!
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