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False Starts

Also known as whipsaws, false starts occur when your setup gives a positive signal, immediately followed by a reversal. You are no sooner stopped out of your position when the setup gives another buy signal. This is frustrating; and expensive. Many traders lose heart and fail to take the second entry, only to find that the trend spikes sharply upward, leaving them ready to throw their PC (or themselves) through the window.

Shake-Outs

If you move your stops up to below the low of each subsequent correction, there are going to be times when you are shaken out; no matter how strong the trend. It is just in the nature of the beast. Even if you are more cautious in ratcheting up your stops, applying some kind of filter, there are still going to be times when you are stopped out. And they are going to be expensive -- because of the filter. Shakeouts are covered in more detail elsewhere in the Trading Guide.

Even the strongest trends attempt to shake you out. I am reminded of riding a rodeo bull. It will head off at breakneck speed while you hang on for all you are worth. Just when you feel that you have adjusted to the speed, it will reverse direction. If you are not prepared for this you are going to eat dirt! Another trick is to turn and turn and turn, until again your body senses the rhythm, then, just as suddenly, it will reverse direction. Or the bull will fake to go one way and then take off in the opposite direction.

Example

Here is a classic fast-trending stock from the ASX 200. Arc Energy has increased by more than 1000% in the last 4 years. The stock completed a broad double bottom in 2001, with a breakout at [C], and has never looked back. I have used point and figure charts because they are less subjective than the normal closing price or weekly candlestick charts.

Can you see how difficult it is to stay with the trend? Either insiders or professionals had recognized the stock's value and tried every trick in the book to shake out existing positions and claim a bigger stake for themselves. In all there are 16 potential false breaks or shake-outs.

To read further - Click Here

Or go straight to one of the sub-topics:

• Late Exits
• Taking Profits Too Early
• Back-Fitting
• Design Considerations
  ~ Type of Stocks and Trends
  ~ Retracements
  ~ Time Frame
  ~ Transaction Costs and Slippage
  ~ Consolidations
  ~ Realistic Expectations
• System Objectives
  ~ Example
• Summary