On Holding a losing trade-
We've all likely done this.
fundamental traders have beliefs about the value of their investments, and expect that the markets will eventually become conscious and come to the same rational conclusion.
Traders should not have the same excuse to stay in a losing position- Unless their goal is indeed to become a long term Investor..
We can-and will get caught - as Investors- or Traders in a price turning against us.
Sometimes it occurs just overnight on an earnings report,That may have not been foreshadowed... a change in the market that has been coming for a while, or an about face due to other elements affecting the position are often telegraphed in advance by a slowing momentum. Sometimes, this momentum slowing sets the stage for a higher run- but it can also foretell of a pullback/decline.
The astute price action trader likely can see such signals leading up to the decline, because of their skills and experience- Others- rely on other measures- such as Indicators and oscillators- and moving averages- to help them interpret the subtleties of what they cannot discern in the price action itself.
Indicators and oscillators take some portions of Price action and translate that into a graphic that the viewer can easily understand- What one is viewing is based on past price action, and that does not necessarily mean it will continue in the future.
For my short term trading- a faster chart and some moving averages- and understanding of the larger trend and where my entry is positioned is a good start-One should have trend lines on the predominant trend- Weekly-Daily-hourly....
As far as keeping one from holding on to a winning trade too long, or getting into a winning trade too early- or too late. I started to think about what is perhaps useful indicator - and i am presenting this outline of the MACD histogram as something one may find beneficial. Read stockcharts to learn more about this indicator of an indicator-
http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram
There are a lot of ways one can format this indicator to serve their purpose for study and backtest to see if it helps or hinders and should be abandoned- I will be looking at testing this out in my own trading- to see if it helps-
One can vary from the standard 12-26-9 period- the faster the period one uses- as with any indicator, the information will be based on less averaged information.More timely-
Technically,yes one could simply use the 0 line cross as an entry and exit. One could speed up the slower 12-26-9 - and modify it to a "faster" response time- With a faster response comes more timely and earlier signals- and more false signals-as well.
For illustration- and some possible "rules" -I put a moving average ( your choice ) on the histogram itself in the charts- So, one guideline would be- when price and the histogram is increasing, and above the moving average line- stay long the trade- keep the stop held back- as the histogram starts to decrease below the moving average- it is just indicating momentum is slowing- but that is a caution as well - watch price action relative to the moving average- as long as price is closing above the uptrending ema , the trade should be held, but stops may want to be tightened for some of the position when this occurs.
Once the trade drops below the ema, the histogram will also likely drop below the 0 line and the histogram bars are below the declining histogram average line. The trade should theoretically have been exited by this point. As price declines, and possible momentum lower increases, the histogram bars will increase in size away from the 0 line.
This is a clear signal to Not take an entry- yet-
When the declining histogram steps back to become a smaller bar, it suggests the momentum is perhaps slowing- possibly a change in direction. It is a tenative early signal to look to take a long position may be sizing up. One could view the price action at that moment to determine if a trade may be taken- Or , one could wait and get a 'safer' but delayed signal, by waiting for the histogram to close between the 0 line and the histogram
ema line- This is also below the ) line - and early and aggressive-
One could start by testing the conventional 12-26-9 and seeing how well the 0 line crosses work as entry /exits- and then consider modifying - and back testing-
What may prove useful is how long one could have stayed in a winning trade but jumped out early, and stayed too late as a winning position turned and declined.
If interested, check this out on your past trades, and determine whether it has promise-
As with most indicators- the information itself should not be the sole criteria to make a trade decision based on just this one indicator-
The chart period i used on the SPY was just a 1 year period- and this indicator looked
interesting in keeping one on the proper side of the trade- One would have to test this through each successive period to find where it falls short. False signals in non-trending periods- One could also consider splitting a position depending on one's entry and overall gain.
