How Not To Get Knocked Back and Forth
The market is tough, ruthless, unpredictable and frustrating. Getting “whipsawed” is the way many traders are introduced to the market’s many whims.
What is it? It’s when you buy something and it gets tossed back in your face. The price of your stock falls, and since you don’t know how far it will fall, you sell for safety’s sake. Or the price might hit your stop loss, and you are automatically sold. Then, seemingly at the moment you hit the sell button, the stock reverses and pushes to new highs. This is the sign of a volatile market, and it will frustrate the heck out of you.
When the market has a clear trend in place, you have a better chance to prevent whipsawing. A healthy market will “stair step” higher, taking two steps up, one step back, then another two steps up and one down until the trend ends. But when the market is in flux, it’s not easy to combat the whipsaw effect.
The most effective way is to be more aggressive with your profit taking. Let’s say you buy XYZ as it crosses a breakout at 40, and it runs to 42 before falling apart. Instead of letting it slide to your stop loss at, say, 40, why not grab a profit at 40.75. Granted, it’s not much, but it beats a loss. Rule No. 1 in a whipsaw market is: We don’t have a trend, so we need to take anything the market gives us.
We don’t like to lower our stop loss for our entire position. If the stock falls under a stop no one knows if it will indeed reverse back up. You may end up selling even lower. But we can effectively lower the stops by taking a half profit on the first move higher. We like the idea of selling half positions when we have a profit. That locks it in but leaves some stock in play for possible gains when the reversal ends.
Taking half profits allows us to “adjust” our stops. For example, we buy XYZ on a move over 40, and it goes to 42 before starting to fall apart. So we sell half our position at 40.75, giving us a skinning 75-cent profit. Now, instead of keeping the stop at 40, we can adjust it to 39.25. If XYZZ falls all the way to 39.25 and we are stopped out, we’re still statistically flat on the trade. We gained 75 cents and lost 75 cents. No big deal.
Suppose the whipsaw is a one-day event, and even though XYZZ falls to, say, 39.50, it explodes up the next day to 41. We are still in the game with half our position and in line for more profits if the advance continues.
This is the most effective way we know to give a stock a bit more wiggle room in a volatile market. Be fast to take profits, and don’t be afraid to sell half positions. The combination will often keep you in play during a whipsaw market without the frustration of getting tossed back and forth.
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