Bubble Trading eBook
Filed Under (Forex eBook, Trading System) by ForexDigg on 30-07-2008
Tagged Under : discipline, intraday trading, profits, stop loss, trading tools, volatility
This is the last in the series of notes on GMMA applications. Bubble trading is a speculative activity. It calls for good trading skills and excellent trading discipline. The objective is to ride the momentum driven bubble for as long as possible. Exits are fine tuned using a variety of volatility based indicators and techniques. The end of day chart is used to set the general scene for the exit, but the actual exit is usually managed using intraday trading tools. Many traders avoid speculative bubble trading because it is so demanding. However, there are times when we enter a trade which shows a steady trend, only to find that a bubble develops. This poses several dangers and some temptations.
First the dangers. Bubbles inevitably burst. When they collapse prices often fall from a great height. In some cases this fall is fast enough and hard enough to seriously weaken the underlying trend. Bubble collapses can wipe out not only bubble profits, but also profits accumulated over many weeks or months. Recognizing these bubbles is a useful skill to develop because we can limit the damage from a bubble collapse.
If we have not set out to trade a bubble, then we may be tempted to take profits from the temporary bubble as it develops. This is a sound strategy, and can be used to protect profits or take opportunity profits, while still intending to remain with the underlying trend.
Many investors simply ignore the bubble, letting it collapse back to the trend. This may mean ignoring exit signals generated by other indicators. The bubble trade in this situation can attack our trading discipline. Traders need to be clear on when it is appropriate to ignore volatility based stop loss indicators in this situation.
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