The bouncing ball theory is not about a trading system, it is about the reality of cutting losses quickly and why it is important to do so.
Can a ball bounce back if it doesn’t hit the floor or any hard object on the way down?
Of course not, the ball will simply keep falling until it hits something. And the lower it falls before it hits something, the harder it is for the ball to bounce back to the level it falls from.
In order for our portfolio to bounce higher after a minor correction, we have to ensure there is a floor at a level for the portfolio value to bounce to a new high when the prices of the stocks in your portfolio increase. The only problem is that when you are holding stocks that are “trending” against you and you do not cut your losses quickly, these stocks will lower the floor of your portfolio. As a result, the value of your portfolio will be much harder to bounce higher than your previous highest level when your other stocks begin to increase in price.
In other words, when you gain 3 steps, make sure you don’t give back more than 2 steps (or 3 steps being the maximum); otherwise, it will be difficult for your portfolio to bounce higher and higher every time stock prices continue to increase.
In short, CUT YOUR LOSSES QUICKLY!