Watching For a 10% Correction

19 янв. 2022 г.

Over the last 20 years, a 10% correction has occurred in about 12 out of those 20 years. The point is: 10% corrections are pretty common. Also, of all of those drawdowns, the average pullback was actually 15%. So not only are 10% corrections common, but they can go to 15% without being out of the ordinary.

-20% drawdowns are less common. If you use the last 50 years of data, you can observe that they usually occur every 10 years or so.

-30% drawdowns far more rare, but still occur as seen in years like 1999/2000 or 2008/09. You want to be prepared for anything.

Keep in mind a lot of this data changes depending on how you study markets, specifically when you begin backtesting the data and what index. For example the S&P 500, Dow, or Nasdaq. In addition, the data changes fast depending on your starting point from 1920, 1950, or more recently like 2000.

With all that being said, for swing traders, there is one interesting anecdote to consider:

On average, the biggest up days occur within two weeks of the biggest down days.

Picking bottoms and buying dips is extremely challenging. But, over time, the worst down days and worst corrections have lead to the biggest bounces and up days. As a swing trader, this kind of volatility is what can make or break a year of trading.

Here are some final notes:

1. Swing traders can make some excellent trades shortly after the biggest drawdowns
2. Corrections have happened all throughout history with a 10% correction being fairly common and a 20% not being out of the ordinary.
3. Support, resistance, and other indicators are important, but so to is measuring the extent of a drawdown.

With all of that being said, I have no idea where markets are going next. I am simply watching, setting an alert, and fascinated by the price action we could see at -10% for the major indices (if they get there).

I suppose that means a little more patience.

Good luck and thanks for reading!