Corrections Create Confusion for Both Bulls and Bears

Corrections are nerve-racking events. Their presence causes a trader to doubt their trade sometimes they make a trader question their discipline and method. Assume you were abullish holding of various stocks, ETFs and/or mutual funds. February rolls around and the swiftness of the selloff would cause anyone to question their bullish thesis. As a result, such a trader would ask themselves; Has the trend changed? Should I sell my positions to avoid further selloff? Maybe I should lighten up. Maybe I should hope for a bounce and sell at that time. Or maybe, I should just ride out the turmoil. Afterall the long-term trend has been bullish and while the recent selloff was scary, maybe the trend is still intact. It is this self-doubt that often causes investors to buy and sell at the wrong time and why so many advisors simply recommend people buy and hold no matter what.

On the other hand, take the bearish trader. Assume they caught the first leg down anticipating a very large selloff. Then the inevitable bounce comes along, correcting the initial leg down. Sort of where we are now. The bounce feels much stronger than a bear might expect. This bounce puts doubt in the mind of the bearish investor who wonders if they just sold when the market is simply shaking out some weak bullish hands who are using too much leverage or simply entered the market too late in the game to have some paper profits. These folks are in emotional turmoil just like the bulls. As the bounce proceeds, they see their profits erode. As this happens, they question their bearish thesis and begin to ask them selves if they should close their bearish trade before all their profits disappear.

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