What is correction?

A correction in the cryptocurrency market is a temporary decrease in the price of an asset within the overall trend. Usually, a correction occurs after a significant growth, when traders take profits, and the price temporarily rolls back a few percent. It allows the market to balance excessive pressure from demand or supply, creating conditions for more stable growth.

Corrections often range from 10% to 30% of the previous rally and play a key role in creating healthier price movement.

How to understand that a correction has begun

A correction differs from a market crash in the depth and duration of the decline. It usually lasts from a few days to a couple of weeks, after which the price stabilizes or returns to growth. To detect a correction, traders use technical analysis, including indicators such as support and resistance levels, RSI (Relative Strength Index), and moving averages.

For example, if the RSI is above 70 (overbought), there is a high probability that the price will soon start to decline. Traders also pay attention to support lines, near which the price may temporarily stop.

Examples of corrections in the crypto market

  1. Bitcoin Correction January 2021
    Bitcoin hit a new all-time high of $42,000 in early 2021, followed by a correction of about 25%. By mid-January, the price had fallen to $30,000, but then began to rise again. It was a classic correction caused by profit-taking after the explosive growth that began in late 2020.

  2. Ethereum Correction May 2021
    In May 2021#ETH reached $4,300 before plummeting to $2,100. This more than 50% drop was due to the overall decline in the crypto market, but in the long term it turned out to be a correction, as the price began to stabilize and go up again the following month.

  3. Altcoin Market Correction in Summer 2023
    In July 2023, when many altcoins such as#SOL And #ADA , reached their peak values, followed by a correction of about 20-25%. At that time, a significant part of the cryptocurrency capitalization was concentrated in Bitcoin, which led to increased volatility in the altcoin market. After that, the market stabilized, and by September, prices began to gradually recover.

Corrections in the crypto market can occur for a variety of reasons, including:

  • Profit taking: When prices reach new highs, many traders begin selling assets to lock in profits, causing the price to temporarily decline.

  • Regulatory news: Announcements regarding cryptocurrency regulation, especially in large economies, can trigger corrections as traders react to potential changes.

  • General economic climate: Economic instability, rising interest rates, inflation, or changes in monetary policy may impact the cryptocurrency market and cause corrections.

How to use correction in your strategy

  1. Buying on a pullback. Traders often view corrections as an opportunity to buy an asset at a better price. It is important to note that this strategy is only effective in an uptrend. For example, if an asset you are interested in after rising to $30,000 pulls back to $25,000, this may be a good opportunity to buy, provided that the long-term trend remains up.

  2. Support and resistance analysis. During a correction, traders pay attention to key support levels that may indicate the end of the correction and the beginning of a new impulse. For example, if an asset is in the support zone at $2,500 after falling from $3,000, this may be a signal to buy if the price bounces off that level.

  3. Using indicators. Indicators such as RSI and MACD help to assess the level of overbought or oversold of an asset. It is important to remember that if the indicator indicates oversold, it may signal the possible end of a correction.