How To Avoid Getting “Washed and Rinsed” in the Markets (Part 4)

07/24/2008 12:00 am EST


Timothy Morge


Now let’s switch back to a traditional bar style chart and evaluate where the market is at when this wide range bar lower closes.

A surprising number of traders continue to use lagging indicators like moving averages, MACD, stochastics and simple ‘loose fit’ trend lines that are off set a small distance from the action. Their thinking is that these indicators keep them in long-term trending markets, thus letting them ‘catch the big ones’. You can see from the chart above that the ‘loose fit’ trend line has not yet been broken, so even though the series of prior lows that formed a shelf of support was broken, many traders still have not exited their positions; in fact, most lagging indicators still had not turned down, because this is only the second bar with a lower close. As hard as it is to believe looking at this chart, a good portion of the market is still long Euro FX against the US dollar as this second bar closes!

I said earlier that losses are a part of trading. In my opinion, the traders with long positions should have been stopped out of their long positions long before the close of this bar, either with a profit because they had entered much earlier in this strong up trend or a loss, because their stop loss order was executed as price turned down hard. Those traders still long at the close of this second bar are afraid to take the loss, frozen by fear and greed.

More in part 5.

Timothy Morge

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