One of the factors to consider when trading with stop-losses is whipsaws. Whipsaw is the name given to the tiny and regular market movements during trends. For example, when a share is in an overall bull trend, it will periodically turn over and fall in price for a couple of days, before resuming it’s general upwards trend. This is a whipsaw.
A whipsaw is a representation of profit-taking going on in the market. People who have made
a good profit on the share after it has had a strong rally up are now selling to realise that
profit. Their selling pressure temporarily halts the upward bull trend. The market absorbs
these sellers with an abundance of buyers and then the share continues its bull run. Whipsaws
exist in bear markets too.
One of the threats of using stop losses is the risk of being “Whipsawed-out” of the market. If
the whipsaw is greater than your stop loss, then you may end up selling before the share
reaches its actual peak. This is just one of the realities of share trading. It will definitely happen to you. It happens to the best of us. All you can do is to develop a series of selling
strategies to complement your stop loss. Serious traders have been known to use up to and over 5 different selling indicators on each trade. All indicators must be positive before they
will sell the share. Even then, it only improves their trading, it doesn’t make it 100% reliable.
For most people, though, just using a stop loss will go a long way to improving their trading results.
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