Why You Should Love The Whipsaw Trade
Do you know what most traders hate the most? It is not losing money -- everyone understands that losses are part of the game. What traders hate the most is getting whipsawed. Go long, get stopped. Flip the position, go short and watch in horror as price retraces to your original entry and stops you out again. If you just held on to your initial long you would have been back to break even. Now you are double negative for the day!
If you day trade FX you’ve had this happened to you many times, and I bet that nothing has made you more annoyed than the whipsaw trade. Yet here is the truth of the matter. If you ever want to succeed in trading you must learn not only to accept the whipsaw but to actually love it.
Why should you love the whipsaw trade? It’s like death by a thousand cuts. Exactly! Think about it for a minute. What are your chances of dying from a few superficial scrapes? None. On the other hand you can bleed out from one large wound in matter of minutes. Your account is very similar to the human body. It can absorb a lot of small stops, but it can’t recover from one single double-down-every-50-pips-until-I run-out-of-margin trade.
There is nothing more tempting than pulling a stop after being whipsawed a few times by the market, but as I have learned the hard way, this the absolute worst thing to do. Here are some simple statistics to remember. If you are running a strategy that has a 60%-40% edge the normal chance of hitting six losses in a row is only 41 basis points or 0.41%. That may seem ridiculously small, but if you trade every day, this will occur with regularity one out of every 200 trading days. (If you trade more actively like I do then the probability increases to one in 50 days).
In short if you day trade, you are going to be wrong. And you are going to be wrong a lot. That’s why its crucial to love the whipsaw trade. It’s the best risk control tool at your disposal, because it is keeping you alive until the market turns your way.