Market Corrections vs Trend Reversals

In recent months, it's been nothing short of a blood bath for multiple asset classes. Amid all this red, I have been silently accumulating tokens for a few blockchain protocols in which I hold firm beliefs. As Bitcoin consolidates between 20,000 and 24,000, it seems investors are becoming more optimistic for a turnaround in market sentiment. Price action has begun to show hints of recovery as the overall cryptocurrency market cap has once again surpassed the trillion-dollar mark. Crypto enthusiasts worldwide are waiting anxiously for the next bull cycle, and with multiple partnerships and Web3 services being unveiled, it can seem like it isn't that far away. Before we get our hopes up, I want to clarify the differences between a trend reversal and a slight correction or pullback.

Market Corrections

On a macro scale, corrections are short-term pullbacks that occur after a dramatic change in price action. In an overall up or downtrend, these corrections allow the market to absorb gains (or losses) and prepare for another rally in the direction of the overall trend. Corrections can happen in any timeframe on a chart, from hourly, to daily, monthly, etc. They're more common in volatile asset classes such as cryptocurrencies.

Common Causes: The News

It's no question that the news plays a crucial factor in asset price action, it's one of the most common catalysts for market corrections. Media attention for a specific protocol places a rather biased consensus around the project, causing investors to either sell or acquire new tokens depending on the information at hand. Network outages are another major factor, which most investors find out about through the news or social media. The news is where you find the latest update for things regarding project updates, regulatory progress, business merges, and more. Applying your own knowledge to any newfound information will help you make a better decision responding to external speculation. It's important to note that corrections can occur in both a bull and a bear market.

Trend Reversals

You can think of trend reversals as a more severe, long-term correction. They are not as common as a short-term pullback, as reversals last much longer before recovering. These changes in direction are indicated on the longer timeframes and affect the price action of every timeframe that follows, from the monthly chart, down to the hourly. Similar to small pullbacks, changes in long-term trends help balance out the market, because everything that goes up, must eventually come down (and vice versa). Because bull and bear markets serve as overall trend directions, the duration of these trends can vary based on the current state of the economy. Bear markets tend to happen as the result of a recession or another asset class crashing like the stock market. This is normally followed by global pessimism, which enables prices to continue plummeting. On the contrary, bull markets are normally the result of a thriving economy, accompanied by worldwide optimism. As the overall economy begins to recover from a recession or high inflation, the markets will follow behind.

Recovery Time

Short-term pullbacks can recover as quickly as they began. Corrections on the hourly timeframe can recover in the same day, whereas a correction on the weekly timeframe could take a month or two before continuing in the overall direction of the current trend. Day traders are familiar with trading dips and cashing profits once the market recovers. Corrections are normally 5–10% changes and can almost be anticipated with proper technical analysis. Trend reversals can last on average about 10 months, but there have been times where they go on for over a year. The crypto crash of 2013 lasted until 2015, a whopping 415 days. Historically, bull markets are projected to last longer than bear markets with euphoria and FOMO extending the dramatic incline. Fortunately, with a proper investing strategy, anyone can profit from the market regardless of the current conditions.

Navigating Trend Reversals and Corrections

Holding On for Dear Life (HODL)

Realistically speaking, long-term holding is probably the safest, most rewarding method for investing. Returns are always greater on a macro scale, just look at Bitcoin's returns for 2022 and compare them to Bitcoin's returns over the last decade. Bear markets have a way of separating the prepared from the unprepared, and while one person might see them as catastrophic, someone else might see them as an opportunity to accumulate at a discount.

Diversifying Your Portfolio

It has been said throughout history to never hold all your eggs in one basket. Distributing funds across multiple asset classes can minimize losses as some assets are more stable than others. Cryptocurrencies are more unpredictable than stocks, so allocating a smaller portion of your funds to these digital assets might be a better option. An ideal portfolio has funds distributed across various assets, commodities, properties, etc.

Sticking to Your Investment Strategy

Keeping a long-term perspective and remaining disciplined in your approach can help you weather any storm the market may throw. Those who have believed in Bitcoin since the very beginning are most likely thriving right now because they stayed grounded amid the multiple bear markets they endured. Understand that losses are a part of the game, but those losses are only finalized once you sell your tokens.