understanding and avoiding whipsaws - II

how do you coem down from 5th floor to the ground floor?
do you use a slide (like the one in the kids playgrounds)
or do you use stairs?
obviously, stairs.
isn;t it surprising that in stock markets
we have both
- slides, as well as
- stairs
for the prices to come down or go up!
rather there is one more way
- the drop!
but the good news is
that their is no fourth way!
so, in other words
if you can train your eye to spot the three formations in a price chart
and understand when which one is used
you can foresee the presence or absence of whipsaws!
e.g. a slide typically happens when the trend is about to start.
a staircase if used when the trend has started and is continuing and about to continue.
a drop generally, happens when there is a sudden panic sell-off or sudden change in the fundamentals.
these, three are just examples and are neither absolute nor exhaustive!
all i have realised and want to say is
that these three ways are the only ones which i see liberally spread in every chart that i open.
i have realised that if the price is coming down or gong up using a staircase,
then i should expect and anticipate a rangebound consolidation or contraction
after the spike marking the vertical axis of a stair....
we can understand and anticipate the presence or absence of whipsaws
by focusing on the need for the same.

(niftyshots.blogspot.com)

understanding and avoiding whipsaws

every trader fears whipsaws.
so much so that he or she keeps the fear switched on all 24 hours
even after the market hours.

marie curie had said
"nothing is this world is to be feared
but to be understood."

going by this
let's try to understand whipsaw
and cut the fear to a realistic size.

whipsaw doesn't happen all the time.

in actual, 4 types of situations can emerge

1.no whipsaw, big move
= dream outcome a trader dreams of.

2.no whipsaw, small net move
= no-trade day

3.whipsaws, followed by big move
= if you survive the shake-up and still manage to be awake and in the trade in the right

direction, you will forgive the nightmare.

4.whipsaws, almost no net move.
= the nightmare!

so, as you see
you need not fear all the time.
rather, you should try and find ways to anticipate and expect the stage
and avoid the bad setups
and trade the good ones.

how to identify?
after pro-trend big moves, expect whipsaws called consolidation.
at advanced stages of trends, expect markets to rest and whipsaw.
if you can successfully identify and avoid trading urge in the above mentioned conditions
you need not fear whipsaws leading to financial whiplashes
and hence trade with confidence!

(www.niftyshots.blogspot.com)

least painful trading method - II

(this is a sequel to part I. to understand it in the right context pl read part I and the related discussion at http://www.mudraa.com/singlepost.php?messid=74251)

here is a reasonably dependable way to successfully identify and ignore the false price crossover of sma line

in other words, this is a good way to anticipate and foresee a whipsaw before hand:

keep rsi 14 and william%r14 charts open under the main price+sma chart

if the price cuts sma from below and gives a buy signal but

william%r is near extreme overbought boundary whereas rsi is not near any extreme

square-off short position but wait for going long

9 out of 10 times price will reverse and short position will need to be taken again

if all this happens near the close of the trading day

the risk of keeping the short position open is well-taken!

---

conversely

if the price cuts sma from above and gives a sell signal but

william%r is near extreme oversold boundary whereas rsi is not near any extreme

square-off long position but wait for going short

9 out of 10 times price will reverse and long position will need to be taken again

if all this happens near the close of the trading day

the risk of keeping the long position open is well-taken!

---

even otherwise,

this is a superb way of successfully spotting reversals 9 out of 10 times