In order to be a successful trader and trend follower, one must be able to take losses. Taking losses means being wrong to some people. When taking losses, it can cause traders to let their emotions get the best of them, resulting in jumping into various trades without taking the time to analyze the current conditions, which will likely lead to further losses. Whipsaw losses are one of the main reasons for traders to bust n their account.
In this blog, we are going to review how to deal with whipsaw losses in trading.
What Is A Whipsaw?
A whipsaw describes the movement of a security, at a given time, the security’s price is moving in one direction but then quickly pivots to move in the opposite direction. Whipsaws traditionally move in two different patterns. One involves an upward movement in a share price that is followed by a drastic move downward causing the price of the share to fall relative to its original position. The other occurs when the price of a share drops in value for a short time and then suddenly increases to a positive gain that is similar to the original position of a stock. An investor or trader is considered to be “whipsawed” when the price of a security or stock they have just invested in suddenly moves in the opposite and unexpected direction. Whipsaw patterns most notably occur in volatile markets in which there are unpredictable price fluctuations. Day traders and short-term investors deal with whipsaw the most, while those who focus on a long-term, buy-and-hold investment strategy can often ride the market volatility and finish with positive gains.
Dealing With Whipsaw in Trading
While whipsaws are a part of trading, knowing how to deal with them can help traders and investors significantly when it comes to avoiding whipsaw losses. Here are some helpful tips for dealing with whipsaws in trading.
Get Comfortable With Losses
As mentioned, losses are a part of trading. For trend traders, whipsaws may occur repeatedly in a range bound market. For traders, this can be extremely frustrating and may cause them to completely change their strategy, one of the common investing mistakes to avoid. The trick, however, is to keep losses minimal by avoiding large losses during whipsaw periods. To do this, have a loss limit order for your account set. If breached, it is best to pause trading to protect capital.
It is essential that your system is able to take a position in a trending market, but then also be able to ride that trend to the end for higher profits. Most beginning traders will exit out of trades at the first sight of a loss before they are finished trending because they are scared the market has gone too far and will diminish their expected profits. Instead of risking these losses, investors should set a trailing stop take them out of a trade when the trend is finished, and only exit once you are stopped out.
Stick To The Plan Even After Losses
Both beginning and weathered traders will experience drawdowns in equity — this is where the trader has a long string of losses or an overall losing period. It is important to remember not to change your strategies or methods just because of a drawdown. If you have tested your system and it works, make sure to stick to it and keep taking your entry signals, even if you experience losses, or you will miss that one big trend that pays for all, if not most, of the previous losses. It is important to remember that sometimes your strategies may have to be adjusted for market volatility or if it is range bound.
Utilize AlphaDroid’s StormGuard™ Market Crash Protection
To ensure you remain protected from whipsaw losses resulting from knee-jerk reactions to market dips by not reacting too quickly and to minimize the crippling losses from long duration bear markets by not reacting too slowly, use the StormGuard™ Market Crash Protection from AlphaDroid. Our StormGuard algorithm monitors overall market health and advises strategies to move to safety during a market storm. It incorporates three distinct data sources with 12 different measures to ascertain whether the return prospects outweigh the risk conditions of the market.
By following these tips, you will be better enabled to handle whipsaw when trading. Remember, the best way to remain safe from whipsaw losses is to use the industry’s best performing market sentiment indicator! Start Your Free Trial of AlphaDroid Today!