How To Avoid Getting “Washed and Rinsed” in the Markets (Part 3)
07/23/2008 12:00 am EST
Now let me show you what happens, using candle stick bars, when the majority of the market gets caught with the same directional position and most are not using adequate stop loss or stop profit orders in their trading.
Price made a marginal new high for the move and then simply plummeted. Although some traders were probably working stop profit orders, most traders got caught holding long Euro positions against the US dollar that quickly lost quite a bit of value.
As the second bar closes, the action is still quite hectic and it was clear from talking with many of my contacts within the cash FX community that most traders were long cash Euro FX and got caught because they were using inadequate stops [or weren’t using stops at all!]. This may have exaggerated the move—but in any case, all traders should have been working either stop losses below their long Euro FX positions or stop profits if they had profits in the positions to protect. Those traders that were working either scrambled to get flat or sat, frozen, while their positions went against them and their losses mounted.
Let me repeat my number one rule: ALWAYS trade with stop loss orders or stop profit orders in the market! You must protect your capital at all times!
More in part 4.