Whipsaws
Wondering about whipsaws ...
I tried over 6-8 trades (all long) over the past week. Exited most of them because of whipsaws. I had a stop loss of about 1.5%, and when I saw price dropping 1%, I thought ... why lose another 0.5% !! In all cases, the price did not touch my stop and moved higher eventually. While it is partially a vindication of my initial assessment, I wonder how to deal with such stuff on a regular basis.
I think the challenge now is different from 2 weeks back when I tried my first technical trades. Some notes, some unresolved lines of thinking :-
2 weeks back, the dailies were as oversold as hourlies, and in some cases even weeklies. Momentum upwards was not as choppy. However, as you go from extremes to a more moderate situation, the slope of the price moves changes from let's say 50 degrees to let's say 25 degrees. Obviously the price bars in the second case will have much more overlap between each other even if they are moving up (most of the time).
Also given that there is an overlap, we will definitely have time periods where the current price is lower than the high of the previous bar ... this is not rocket science ... if the bars overlap, at some time the price on the second bar will be lower than the price of the previous bar. Should you worry then?
The other aspect is that if you are working on hourly charts, you have no business checking prices every 5 minutes ! I guess that's why many people in many threads talk about "only if it closes above/below" ... maybe it is the disciplining act, maybe it is the fact that incomplete bars are NO substitute for complete bars.
Of course I may feel different tomorrow, but as of now, I think the approach for bar/candle completion is the best one. If your initial analysis is correct, you still have more than 1:1 chance of being right, so maybe you will make it next time !!