Managing correction gives you undisputed strength to beat noise trading. This propels you to better earnings and healthier investment journey.
First, you may be wondering what, “What do you mean by a commodity?” Commercially, a commodity is a good that can be exchanged with other goods.
These goods are in a natural state and are used to produce other goods. For example, traditional commodities like gold, natural gas, or foreign currencies (in the modern perspective of a commodity). Exchangers (Future’s Contracts) standardize the quality and quantity of the commodities.
For example, Saxo Markets set the quantity and quality of the regular exchange of gold. A commodities market has higher highs and lows as well as lower highs and lows, whenever you consider the trend of exchange of the commodities. The fluctuations in price may lead to a correction.
What is Market Correction?
Correction is when the commodity price breaks without affecting the trend of the general displacement of the price. This break is usually between 10% and 20% of the price before the break.
A price of more than 20% of the trending market would result in a market bear. This definition may coincide with another crucial financial term, reversal. Let me explain.
In correction, the price falls then picks up again to continue the overall price trend of the commodity. For example, although there are ups and downs, the line of change generally maintains an angle. On the cartesian plane, this may be of 45 degrees from the x-axis.
On the other hand, a reversal changes the shape of the trend. For example, a reversal does not allow price to retreat in the initial 45 degrees but proceeds downwards to make a new trend of 180 degrees.
Correction is a bad thing. The sudden break in price leads to a loss of value for your investment. For example, a 10% fall would mean you sell gold at a lower price than you bought it.
Again, the unpredictability that results from correction is a huge cause of noise trading. Consequently, you need to shield your portfolio from the aftermath of correction. Here are two paths to manage correction:
Use Tools
With the help of tools, you will avoid the consequences of noise trading. You will know when to hold or sell a commodity. For example, The Zig Zag Indicator. Download this software and use it to monitor the highs and lows.
Consequently, you will know when to sell the commodity. That’s when the fall starts to hurt your protected trend. The Moving Average will help you to analyze a commodity technically. For example, the mean displacement of price.
Alternatively, switch to Line Charts to empower you in spotting significant price areas. It works by taking data as soon as the trading candle closes.
Restructure Your Investment
Besides tools, discipline will help you control correction. Have a financial plan. This will help you know when and how much to invest in financial commodities.
Also, learn to diversify your portfolio. Speculating is a high-risk investment. Meaning putting all your eggs in a basket may equate to financial suicide in the event of a correction.
Lastly, rebalance the portfolio. Don’t over-invest in a particular commodity. For example, strive to have your portfolio have a composition of traditional commodities (for instance, agricultural produce) and modern commodities (foreign currencies).
In the situation of correction to the financial sector, the overall effect may spare a portion of your portfolio.
Final Thoughts
You don’t have to over-struggle or worry about come up with a solution to managing market correction. It’s simple.
First, master the art of self-discipline. Keep a financial plan, diversify your portfolio, and rebalance it to minimize the potential risk of a correction.
On the same trajectory, use current software to monitor the trend of the commodity. Strictly follow this guide, and you will realize a massive return on investment.
Read more below:
- https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/a-guide-to-commodity-trading-secrets/
- https://en.wikipedia.org/wiki/Moving_average
