Underwater Psychology
If you are like anyone else you've found yourself in a trade that is going against you from time to time. You start to imagine reasons why the price could continue to move against you.
For example, this morning I was underwater in a position due to the spike in AUDJPY. The price of oil was rising due to the conflict in Gaza, apparently. At the same time, due to the recent break of a long term resistance line I'd expect a long term upward trend. Oh, not to mention that in thin markets I'm unsure how prices will react to these issues.
On my side was the fact that the 5m, 15m, 1hr and 3hr were all pinned at the top of their respective stochastic indicators.
First, keep your cool. If you are entering with reasonably sized positions you shouldn't be facing an emergency even if you expect the market is in a long term trend against you. If you aren't in a panic then look for the ability to work your way back out of your trades...
All At Once
This strategy is fairly ballsy, but when it works it feels really good. Look for indications that the upward spike is coming to an end. Perhaps a double top, long term indecision, stalling at a resistance level, or some other good probability situation. At this point you can acquire another position. You may find this happens more than once before you get an eventual correction. Each time you dip your toe in draw a new horizontal trend line at your current break even point. Pop out when you have a small profit and get your bearings.
Salami Method
While this strategy is less risky, it can be easier to perform once the market establishes a new consolidation zone. As you approach a high in what seems to be the new consolidation zone, acquire another position. As you eek out a bit of profit close your profitable entry, protecting that profit from a market reversal, and then close off a small portion of your losing trades. Over time you should be able to use many small profits to reduce open positions and square your account.
Who Gets Underwater?
Look, though all the get-rich-quick kiddies in the online forums are trying to scalp their way to riches, this is not how everyone trades. These people use positions that are quite large with respect to their NAV and they are not able to maintain positions during periods of loss. With small trades, patience, and an ability to know whether or not it's time to throw in the towel you can survive being underwater quite handily.
The Big Picture
I like to think of the markets being "rational" or "irrational". When the markets are irrational, they are not adhering to your technical analysis. Whether fundamentals, news, or other issues are taking precedence does not matter. What matters is that you look for periods of rationality to make your trades. If the markets become irrational while you are in the pool, don't panic. Unless things are truly horrific, try to wait until the 1hr or 3hr stochastic indicators have gone your way.
This is how I was able to get out of some underwater trades just this morning. With all the stochastics pinned against me, I opened a position at an apparent top. The AUDJPY then dropped like a rock, below my new break even point, and I closed my positions for a small profit.
I don't care if I missed some upside on a continued drop. I believe the market will continue to move upward in the long term -- so I don't want to hold on to short positions for long term gain.
Hmm, another thought. If you are a beginner and aren't able to generate a high percentage of winning trades, these strategies probably are not for you. You have to be able to create winners or else entering more positions will simply sink you further into distress.
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