Using breadth to reduce drawdowns | stockbee

12/17/2014

Using breadth to reduce drawdowns

One of the trick to using breadth for reducing drawdowns  is to use it as anticipation tool rather than a reactive tool.

The easiest way to do that is to use extreme breadth values. You have to know ahead of time likely turn that way you can close positions at profit and not react once 3 to 5 big distribution days have already happened. If you follow those kind of methods you will invariably be late on both bullish and bearish side.

That is where the skill in using breadth models is. Data on breadth is freely available and if you can use it skillfully to stay ahead of the game you will have less drawdowns and less psychological problem. Drawdowns waste mental and financial energy. It wastes time as you have to spend time recovering from loss.

The best use of breadth is to find extremely bullish or bearish breadth situations. Those tends to be unsustainable and give you early warning signal.


After 4 to 5 distribution days everyone knows market is in correction mode, but if you can anticipate that ahead of time you have an edge. It might be small edge but it is worth studying and acting on. 

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