#Fincabulary 36 – Correction

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Source: https://www.newstalk1160.com

Meaning – A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. The latest stock market correction occurred on February 8, 2018 as the DJIA and the S&P 500 fell more than 10% from their recent highs hit in late January, 2018.

Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either. A correction is very different from a crash since it measures the percentage decline from the most recent high. A crash is generally considered to be a 10% or more decline, irrespective of the most recent high. For investors, corrections provide a chance to see how truly comfortable they are with market risk, and to make changes to their portfolio if warranted. They also provide investors with an opportunity to potentially add companies at discounted prices, or to dollar cost average down on existing positions.

#Fincabulary 33 – Bull Trap

Meaning –  A bull trap is a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline. The move “traps” traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also be referred to as a whipsaw pattern.

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Source: http://www.stockcharts.com

It results from the absence of sufficient buyer interest to decisively reverse the downtrend. Traders who buy the stock on seeing it moving up for a while get trapped at a higher price point once the price reverses to continue its downward trend. Some traders use an appropriate stop loss order instructing their brokers to sell the stock once it falls below its previous minor low in order to avoid further losses.