How To Avoid Getting “Washed and Rinsed” in the Markets (Part 5)

07/25/2008 12:00 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

Even though price continues lower, in the chart below you can see the size of the bars have begun to normalize and price is trading in an energy coil or trading range.

This leads many of those traders that are still long to begin to feel that maybe this down side correction is over—in essence, they are HOPING it is over, and once you begin to rely on hope as a trader, you are in serious trouble. Not only are you likely to take a loss on your current position, you are also likely to continue to trade with false hope. You are lost and alone and fear and greed are eating you alive!

Let’s see what the markets have in store for those folks.

When price breaks out below the energy coil, the lagging indicators are also turning lower. All those traders that were relying on hope now exit their positions. And something worse happens: Because they weren’t using stops, they are turned completely around. When price breaks below the trading range, they stop themselves into a new position. They sell the cash Euro FX against the US dollar, partly because of the new lows and partly because 99 percent of the lagging indicators have now finally turned down hard. Eager to recover the money they just lost, they jump on what they now perceive as the ‘new’ down trend.

What does the market have in store for them now? Redemption or further torture?

More in part 6.

Timothy Morge
tmorge@sbcglobal.net
www.medianline.com
www.marketgeometry.com

Related Articles on STRATEGIES