Traders and investors in the Indian equity markets have been enjoying watching as prices have been breaking to all-time highs. Of course the big question in everyone’s mind is where will this bull run end and is there anything I can do to protect my capital when it does? While no one can predict exactly where this price movement will reverse since there is no supply level above to signal this, there are some tools that traders can use to identify when the bullish pressure has subsided and therefore marked the time for profit taking in your portfolio.
One of the most common methods is to use a moving average on your chart. The average summarizes the past trend and momentum and when prices start breaking down below it, you have likely seen the end of your trend. There are two problems with using moving averages. First, they are lagging and give very late signals. Secondly, since they are lagging, you are likely to have given back some profits you have made in the previous trend before you exit.
To reduce the lag and hopefully exit with more profits, many traders will look to advanced technical analysis tools such as the Fibonacci Extension tool. This uses the Fibonacci numerical sequence to project probable price points in the future where price may turn. The problem is that the price may only use these areas as pausing points rather than reversal areas and you could be exiting prematurely.
Price is usually the best indicator. Using the definition of a trend can help you identify when the trend is reversing and action is needed on longer term trades and positions.
Again you can see that using this method will not necessarily get you out with the greatest profit but it will protect your money against a large drawdown. Perhaps a combination of the above methods would be a better plan for your trading and investing. To learn more on how to identify market turning points and timing these turns, join us at one of our courses at Online Trading Academy today.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
AUD/USD hovers around 0.6750 amid cautious mood
AUD/USD is treading water near 0.6750 in Asian trading on Monday. The pair struggles amid a cautious market mood, as traders remain wary of the French elections. However, a subdued US Dollar cushions the Aussie's downside.
USD/JPY drops toward 160.00 as risk aversion seeps back
USD/JPY is falling toward 160.00 in the Asian session on Monday, having failed to sustain at higher levels. A softer risk tone and encouraging Japanese Labor Cash Earnings data lift the Yen, weighing negatively on the pair.
Gold price tumbles as PBoC’s keeps Gold buying on hold
Gold price attracts some sellers during the Asian session on Monday. The precious metal loses traction as the People’s Bank of China, the Chinese central bank kept Gold buying on hold for the second month in June, according to official data released on Sunday.
Fourth straight weekly loss for BTC/USD
BTC/USD remains entrenched in a corrective slide, bolstered by the Fed minutes emphasising reluctance to ease policy until confidence in the disinflation process is observed.
French election: It’s all over for Marine Le Pen, but the left weighs on the Euro
The deciding vote in the French Parliamentary elections closed this evening, and the exit poll suggests a shock result. The winning party is the left alliance, the popular front, which was pulled together to try and keep Le Pen’s far right National Rally party out of power.
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