What Happens After A 10% Market Correction?

After a 10% correction in the major indexes, most people are in capital protection mode or are willing to short the bounces. It is not an easy time to buy breakouts in stocks with relative strength, but you should do it – with a smaller position size, especially if the market averages show signs of bottoming.

In bull markets, people anticipate. In corrective markets, people react. If a correction lasts long enough (a couple months), people adapt to the new environment and act like it will last forever. They get conditioned to expect mean reversions and are very nimble in taking profits because they don’t expect them to stick for too long. This is one of the big drawbacks of being too active during choppy markets – even if you end up making money, you get conditioned to take quick profits, which might cost you later when a new market rally begins. There’s no free lunch. There’s price to be paid for everything. Of course, some corrections continue for so long that full-time traders don’t have the luxury of staying on the sidelines and have to properly adjust.

Source: CRASH: How to Protect and Grow Capital during Corrections