Stock Trading: Consolidation, Correction, Pullback - What's the Difference?

Have you ever bought a stock "on a dip" only to be told later that it was a bad time because it was correcting? How do you tell the difference between a correction, a consolidation, a pullback and a dip? And what do you do in each instance?

Correction
Stocks move in trends. A stock rises in a series of higher highs and higher lows. At some point it reverses and turns down. A downward trend is, in turn, characterized by a series of lower highs and lower lows. Once you see a stock make a lower low after failing to make a higher high - beware, you are in a danger zone! If you own the stock, sell, if not, don't touch it, you never know how low it will go. And NEVER average down by adding to a losing position.

Consolidation
No stock rises forever or in a straight line. The advance resembles a staircase: a run-up, a pause or a retracement. When a stocks stops advancing and starts trading in a narrow (or narrowing) price range, it's consolidating its gains. Don't rush in to buy - you never know how long a consolidation will last. The best time to buy is when a stock breaks out of consolidation to the upside.

Pullback

A stock advances rapidly, then stops and turns back down, giving back 20 - 40% of the gain. There are different schools of thought as to when's the best time to buy on a pullback. Some try to buy at the bottom of the retracement, hoping for the lowest price. Others want to see the stock turn back up again. There is no one best way. The risk here is that a pullback can always turn into a correction. The key is for the stock to not make a lower low before turning back up.

Dip

Many volatile stocks fluctuate a lot even during an advance. Trying to catch the bottom of the current price range is buying on a dip. There are many causes for dips - a large sell order, a shakeout, specialists/MMs clearing out stops - you will never know, but the key is that the price usually comes back up on the same day or within a couple of days. Buying on dips is generally safe in a strong market. Otherwise a dip may become a pullback, which in turn may deteriorate into a correction.