One of the key idea which I have come to appreciate more and more is the wealth of information which can be gained when the market correct itself.
Market corrections is a given. To move higher, market needs to correct itself, presumably to shake out short-term traders who mostly lose money over the long run.
There are at least two reasons why we should look forward to market corrections:
- it is the best time to identify stocks being accumulated and thus likely to outperform when the market moves higher. The assumption is that those who know the company really well use market correction as opportunity to accumulate shares cheaply.
- it is the best time to gauge the strength of the market. If the market wants to move higher, market correction is usually reversed relatively quickly. Otherwise, selling begets more selling.
You can expand on these two simple concepts to create a powerful stock selection strategy as well as an early market timing system.