Differentiating downtrend from correction

Trend in stock market can be classified into three categories, uptrend, downtrend and sideways. The basis for this classification is the movement of price behaviour of any stock.

An uptrend stock is supposed to be performing well. In an uptrend stock the price keeps rising and the stock is supposed to be in a bullish trend. Even during uptrend, we notice that price falls at certain times.

This fall in price is sometimes referred as downtrend whereas technically it is correction in the price. Correction and downtrend are terms which are used interchangeably whereas there is a major significant difference between the two.

To understand the difference between the two we need to take the time frame analysis into consideration. For a person trading in ultra-short term or short-term, downtrend in the longer time frame does not bother him.

Let us assume a trader is a swing trader. A swing trader tries to achieve four to 7 per cent in his trade over a period of seven to 10 days. For such a trader he needs to know whether he is in upswing or down swing.

If a person is investing for a long term around six to 8 months, for him a downtrend matters a lot in a bigger time frame. There is a lot of difference between technical terms like downtrend and correction.

Consolidation is a phase where the price varies between a fixed range. This phase of consolidation could be in uptrend or downtrend.

In a downtrend the stock which has been surging upward begins to fall consistently and the price fall is huge and sharp. In a downtrend market there is a series of lower lows and lower highs. It is very important for a trader to identify a downtrend as early as possible so as to exit from the stock.

When the price of a particular stock is in a defined range for very long period then this phase is considered as consolidation. Here the price refuses to fall below a certain point and hence it consolidates at a particular price range.

There is timewise correction and pricewise correction. If the price of a stock falls sharply or it remains at a lower price for very long period, then both mean the same thing. Thus, consolidation is a kind of correction and here the price movement is always sideways, or range bound.

These terms have to be understood in relation to the time frame being considered. In order to understand trend, it has to be always associated with the timeframe also.

(The author is a homemaker who dabbles in stock market investments in free time)