Friday, February 13, 2009

Whipsaw

So I started to do a post yesterday at around 3:00 PM EST that went something like this: "Well, looks as if Mr. Market wants to head lower, with today's downdraft the symmetrical triangle was finally broken to the downside. We'll see if this starts the next leg down in the market." Err.... scratch that... that was before the ridiculous 27 point rally in the last hour on the S&P 500 that put us right back into the range.

Today serves as a great example of whipsaw and a failed breakout. Anyone that had bearish day trades on got it handed to them the last hour of the day. Unfortunately there's not much you can do to predict a countrend rally of that magnitude. I think this also illustrates the benefit of scaling out of a position when you've accumulated a nice profit, that way if the market does put in a hard reversal, you don't give everything back.
In short, scaling out means closing part of your position to lock in some of the gains. For example, if I was short 500 shares of the SPY and I participated in the intraday drop from $83 to $81. I may have closed 250 shares and let the rest ride. Generally when you're sitting on a profitable position you begin to get antsy
to lock in your profits (fear), yet you also want to make as much money as possible (greed). Rather than giving in to one or the other, you can compromise! Sell a portion thereby satisfying your "fear", and keep a portion thereby satisfying your "greed". In my experience I've found scaling out a much easier decision to make from a psychological standpoint than closing all or none.

Tyler -

3 comments:

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Tyler said...

Glad you enjoy it.

QUALITY STOCKS UNDER 5 DOLLARS said...

One wild ride.