In terms of the stock market, price correction is the phenomenon where inflated stock prices drop steeply after reaching record highs. This surge in the stock prices is usually caused by investors who expect gains and buy stocks in huge amounts. Then the fall is caused by investors dumping their shares and cashing in on their profits.
In other terms, price correction, or market corrections, pertains to a decline of around 10 percent and more in the price of a market index or security after a temporary boost.
What brings about price correction?
The value of a stock is always changing. There are times when the market experiences some short term gains if nothing significant has happened yet. Investor psychology has a vital role in driving prices up and down in the bitcoin stock markets.
There are generally two reasons behind price corrections in stocks:
Overbuying while expecting gains:
Whenever you expect greater profits in the near future, you’re bound to buy more units of that security. As you do that, you and other similar investors push the demand for that security upwards. The rise in demand corresponds to a rise in the price.
Now, since you and other investors are still anticipating gains, you will continue buying more units. This will continue to happen until the stock price becomes too high for investors to continue buying.
There will always be a point when investors will decide that the stock will no longer rise in value. As a result, you and other similar investors will cash in on the profits. As investors begin selling their units, the prices get affected and start falling. This is known as profit booking, and it will continue until the prices drop by a significant margin.
Reacting to Price Corrections
Price corrections can be really detrimental. A lot of rookie investors backed out of the game because of their fear of losing money. However, you should never pull out while the stock market is correcting itself.
That’s because losses that have been incurred due to or during a price correction can usually be recovered within a few months. Price corrections are also completely natural, and they happen depending on investors’ sentiment.
If you are going to sell during a correction, there’s a huge possibility that you will not be able to buy more units of the same instrument at a lower price in time in order to make up for the losses.
If you really want to protect yourself from losses during market corrections, you just have to bear in mind one rule of thumb and strictly follow it:
Diversification can offer a lot of benefits to investors and traders. Though many traders underestimate such benefits, proper diversification can in fact save you from huge losses in case you get some bad luck.
A well diversified portfolio is the strongest protection that you can have in times of Bitcoin Price market corrections. Diversification is not putting all your eggs in one basket.