I expect the S&P 500 index to trade between the recent high and low for a while, several weeks o...
How To Avoid Getting “Washed and Rinsed” in the Markets (Part 6)
07/28/2008 12:00 am EST
When price breaks back up into the trading range, the traders that just went short at new lows begin to have a sickening feeling in their stomachs: Did they just exit and get short at the low for the pull back?
And when price breaks above the trading range, the torment intensifies. Most traders that got short at new lows now stop themselves out of their poorly conceived short euro FX positions. And unfortunately, a good many of these same traders now get long cash euro FX against the US dollar, reversing their positions yet a third time!
This move is known as a ‘wash and rinse’ and it frequently catches traders that have just taken a poorly planned loss in the market. Some people may argue that no loss is well planned, but as I stated earlier, losses are a part of trading, so if you were working a stop loss order or a stop profit order, the execution of either of those orders should not have bothered you: When these orders were filled, it was a part of your original plan. Traders that had no plan were left wondering when to get out, how to get out and once out, what to do next. And many of those traders stopped themselves out of their long positions and then stopped themselves into new short positions when price broke below the narrow trading range—right before price rallied out of the hole.
For most of these traders, there is no planning and analyzing going on here—there are only reactions to market moves that stay one step ahead of them. The more these traders trade without plans, the more turned around they become. They are literally setting their capital on fire and their trading accounts are going up in smoke!
Is the torture over? This was a clear ‘wash and rinse’. Has the market now returned to a more normal state and have the majority of traders now found their way back to the ‘trend’?
More in part 7.
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