With the current market action, anyone trading the TQQQ Trading Strategy will be dealing with whipsaws. In my backtesting of the system, this happens from time to time and is just a cost of doing business.
What are Whipsaws?
A whipsaw in the TQQQ Trading Strategy is when the price of the TQQQ is is moving in one direction but then quickly pivots to move in the opposite direction.
In a whipsaw environment, this happens over and over with the stock price giving quick gains only to see those gains evaporate quickly.
In fact, whipsaws can happen in both directions. For example, the price of the TQQQ can quickly move up and then just as quickly move back down to the same level or even lower than the original price where it started from.
On the flip side, the price of TQQQ can quickly move down, and then just as quickly move back up.
It is usually seen in a market that has no definitive trend; the market is moving sideways.
The result is that a trader gets into TQQQ based on the strategy’s signal, only to see the whipsaw happen and the position go the wrong way. The trader buys and in the worst case scenario needs to sell within two days.
As of the writing of this article (November 13, 2020), we are in a non-trending market and seeing whipsaws happen.
The image below will show you what a whipsaw market looks like.
Dealing with Whipsaws in Systematic Trading
The most important thing to remember in systematic trading is that whipsaws happen and you just need to live with them. Especially if dealing with the whipsaws means that you are seeing a string of losses.
You need to keep the long-term picture in mind; the system works over the long term and needs to be traded with that mindset.
Here the key actions to take when dealing with whipsaws in your own trading:
1) Train Your Emotional Response Muscle
Dealing with whipsaws is not about trading technique or indicators. It is 100% about managing emotions.
Whipsaws cause emotional responses which makes us question the systems, our skills, and whether we have the guts to trade for a profit.
My approach has been to take it one whipsaw at a time; one trade at a time. I follow the system, no matter what happens. Anytime I try to circumvent, I end up losing more.
Working with the system and trading robotically takes practice. Focus on learning the system, understanding it, and then trade it based on your trade plan.
What happens in the trade will happen and you cannot control that. All you are doing with a robotic system like the TQQ Trading Strategy is putting the odds of success in your favor.
2) Reduce Position Sizes in Whipsaw Markets
Another action a trader can make when dealing with whipsaw markets is to reduce the size of the trades.
If you have $5,000 set aside for the TQQQ Trading Strategy, that means in a normal market you will allocate $1,250 per trade (more on that in the eBook).
When the market is whipsawing, you can change your allocation. Drop it down to $3,000 and only put in $750 per trade.
Then when the market starts to trend back up again, go back to your normal allocation.
3) Skip the Trades
Another strategy to deal with whipsaws is to skip the trades all together. If you are not comfortable with the market action, then simply do not take the trades.
There are risks with this; if you are a robotic trader then this goes against your system rules. However, if it helps you sleep at night then that is a decision you can make.
Just remember the next two methods to deal with whipsaws…
4) Stick to the Trading Plan
In the description of the strategy in the ebook, I give a detailed step-by-step process overview for trading the system. These are the specific steps I personally use to trade the system.
When the market is whipsawing, then I reorient myself back to that step by step process. I remind myself that the specific process steps to buy and sell based on the signals are part of a backtested strategy that has worked in the past.
It is important to not change the strategy just because of a loss. If a tested system works, stick to it and keep taking the entry signals, even whipsaws are causing losses. If you don’t, you may miss the one massive mean-reversion event that provides a huge gain.
5) Remember That Losses are Part of Trading
I see many traders early in their careers doing everything that can to avoid losses. That is a losing battle.
Losses in trading will happen. The key is to keep them manageable and not devastating. Whipsaws will cause those losses from time to time, so the key is to just accept them and move on to the next trade.
The TQQQ Trading Strategy eBook is only $29.95.
Get complete instructions for this easy-to-trade strategy and take advantage of the TQQQ’s mean reversion tendency. Click on the eBook image to the right or below to buy and trade this system yourself.