Relentless Slide

Why does the market relentlessly slide sometimes? What to do if you are caught on the wrong side in one such slide?

The market moves in one direction, is hammered (in a fall) constantly, and keeps making new lows. This is typical in what is called a 3rd wave fall. In Elliot wave theory, the 3rd wave is the most persistent and longest lasting among the 5 waves in the major direction. You do not have to be an expert to escape or catch a 3rd wave, but you can definitely avoid wrong moves or make use of such opportunities.



As you probably experienced by now, averaging down (for a buy side strategy) is not such a good idea. Most buy side funds get caught in the 3rd wave down after buying into the 2nd wave thinking that a new high will be made. The simplest clue that the market gives before a 3rd wave fall is a lower top or a double top. This is usually a hint at an impending fall. Look for this. If the fall is of the a-b-c type, the lower top will never be close to the absolute recent top. This means that the "a" wave is sharply down and the "b" (upward wave) is nowhere close to the top. Look for this formation to avoid getting caught in a 3rd wave fall or to make use of a 3rd wave up to invest.

Trading Direction Bias

It is natural to have a tendency to be comfortable either on the Buy side or Sell side. That is, going long or short.
There is a danger here that if it becomes a habit it can lead to losses.
You make money if you are right with your directional call. It is observed that many traders make losses on days that the market goes in the direction that they are not comfortable with.
If your system is solid and you are following the correct risk management and money management technqiues and still noting that you are making losses, more often than not, the culprit is market direction.
Simply stop trading for a while. Wait for the trend to reverse (if it does happen) and only then start again.