OK - so seems we have digested the 'basics' of 315 and its time to move to advanced '315' which takes care of how to avoid whipsaws and protect capital.
I will first give you an example of the most painful trade that you can come across in 315. please have a look at below example. The EOD candles are from 4th Feb to 17th Feb with 3 EMA (red line) and 15 EMA plotted.
Now as you can see, 315 generated a buy on 6th Feb since EMA crossover was almost confirmed so we entered longs at around 3.25PM on 6th Feb at 2830.
Now, Nifty swung up until 13th Feb and made a high of 2974 on that day.(If you notice that day was actually our Exit day since again candle body didnt touch 3 EMA). However, for sake of this example, please assume for a moment 3 EMA did touch the candle and we stayed with our longs.
However next trading day (16th Feb) it crashed and touched 15 EMA at around 2850. This is technically where we 'ADD' as per the strategy. So if we add at 2850 we then have 2 lots long at average price 2840. The day ended at 2831 but since 3 EMA was still above 15 EMA we will hold as per the strategy.
Now next day it gaps down against our position, opens at 2800 and finally closes at 2753. Thats when our SAR is hit since 3 EMA crossover is confirmed and we jump into shorts. We have lost a hefty 100 point per lot or total 200 points overall.
As a trader, the first thing I ask from myself here, what could i have done to avoid this whipsaw completely? The answer comes back - NOTHING.
The second thing I ask from myself is - what can i do different to reduce the overall loss in such situations? The reply comes back - well I can be slightly less greedy and delay my 'ADD' to a point where I have some confidence that the correction is over and the markets are swinging back in the main trend's direction.
So I amended the ADD rules slightly. I said I will add only if below 2 conditions are fulfilled:
1. 3 EMA is still below 15 EMA for shorts and visa versa AND
2. The current candle breaches previous day's lows for shorts (previous days highs for longs)
This means that I add longs when i see fresh buying has started after the correction. This is slightly high probability add though it means I dont add exactly at 15 EMA but slightly away from it.
So coming back to the example below, I actually dont add on 16th Feb becasue I am waiting for 17th candle to go above 16th candle which never happened. So I just had 100 point loss instead of 200.
This is how I protect capital by 'ADDING' effectively. In coming days i will talk about 'effective SLs' and 'effective' profit booking.
For the time being, please absorb and post any questions. We will see in live soon how we will do an 'effective' ADD if markets start to fall again.