Reviewed by Aug 27, 2020| Updated on
What is a Correction?
In trading, a correction is a drop of 10% or more in a security's price from its current high. Corrections occur to individual assets, such as an individual stock or bond, or to an index that measures a group of assets.
An asset, index, or market can fall into a correction for days, weeks, months, or even longer, either briefly or for sustained periods. The average market downturn, however, is short-lived and lasts around three to four months everywhere.
Charting tools are used by creditors, traders, and analysts to forecast and monitor corrections. There are many factors which may cause a correction.
From a large-scale macroeconomic shift to problems in a single company's management plan, the reasons behind a correction are as varied as the stocks, indexes, or markets they affect.
How it Works
It's like that spider under your pillow. You know it's out there, but don't know when it's going to make its next appearance. While you may be losing sleep over that spider, you should not lose sleep over a correction possibility.
According to a 2018 CNBC survey, the average correction for the S&P 500 only lasted four months before recovery prices dropped by about 13%. It is however easy to see why, during a correction, the person or inexperienced investor could worry about a 10% or greater downward change to the value of their portfolio assets.
Charting a Correction
Often, corrections can be predicted using market analysis and by comparing one market index with another. Using this approach, an analyst may find that an under-performing index can be closely followed by a similar index that is also under pressure. A steady trend of those similarities can be a sign of an imminent market correction.