All financial markets have only two phases of behaviour.
If you can master these two phases, then you’ll know when it’s time to stay out of the market, and when it’s time to press your advantage.
On Monday, I explored the first phase of market behaviour – impulsive price action. Today, I’m going to go over the second kind – the corrective phase.
The corrective phase is simply a temporary interruption of the larger trend. Here’s how it works…
How To Identify a Corrective Sequence
When a big move is finally exhausted the market will pull back, correcting the prior move. Eventually, the market will finish correcting, and the larger trend will resume.
Traders should sit on the sidelines once a market starts correcting. They should look to get into trades as the corrective phase comes to an end, and the next impulsive phase is set to begin.
You can easily identify a corrective sequence on a price chart because it’s almost always contained by two trendlines.
If the trendlines are either parallel or converging on one another, then you likely have a corrective sequence on your hands.
Here’s an example of a recent corrective price action from a Currency Trader recommendation…
Corrective Price Pattern in USD/CAD
On March 3, I issued a trade recommendation to subscribers of my Currency Trader advisory. The recommendation was to set a buy entry order on the U.S. dollar and Canadian dollar currency pair (USD/CAD).
I had identified a corrective price pattern in USD/CAD, which had interrupted an uptrend that started on February 14. Check out the price chart below…
I’ve drawn the corrective pattern using blue lines. You can see how this corrective pattern interrupted the larger uptrend. This pattern is known as a triangle and is one of my go-to trade setups.
When prices break out of the triangle’s trendlines, you can be sure to expect a big move. And that’s exactly what happened in the case of USD/CAD.
Take a look at what happened after I recommended buying this currency pair…
USD/CAD did indeed have a big move to the upside. As a result, my subscribers were able to bank a gain of around 180% on this trade.
Free Trading Resources
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This is exactly why it’s so important to be able to identify the different phases of market behaviour.
If I had issued my trade recommendation in the middle of the corrective phase, then it’s possible the trade would have been stopped out for a loss instead of a gain.
Being able to differentiate between the impulsive and corrective phases is my foundation for consistently finding big moves in the market.
The good news is that you can do the exact same thing. My suggestion is to start by looking for only one kind of corrective pattern at a time.
For example, you could master the triangle first, just like I did. Once you are confident with the triangle, you can add another setup to your trading plan.
Pretty soon, you’ll have several reliable high-quality corrective price patterns in your trading toolbox.
And that means finding those big moves will eventually become second nature.
Analyst, Market Minute
P.S. If you’re interested in making profitable trades like USD/CAD, you can check out my forex trading advisory right here.
Besides a 93%-win rate, I also provide my subscribers with plenty of educational content to help you start finding big moves on your own.
And if you have any questions about trading or the market, I’m always there to answer through regular videos and updates.
Are you confident in your ability to correctly identify impulsive and corrective market phases?
Let us know your thoughts – and any questions you have – at [email protected].