There are two sure ways to go broke trading a market: picking tops and bottoms based on valuations, and taking trades based solely on indicator readings. When did the Japanese market become overvalued when the Price divided by the Earnings ratio was 30, 40, 50, 60, 70, or 80 to 1? When did silver become over-valued? The previous high before 1978 was $6.40, yet it rose to over $50 per ounce. When attempting to sell a top, focus on an intraday time interval suitable to the market traded. I use 1, 3, and 5 minute charts to trade the S&P mini with a pattern recognition reversal system. Any trader can find an indicator to agree with an opinion or analysis, but it must be confirmed with valid price action. A market is never too high to buy despite the over bought indicator, but may be too cheap to sell based on intrinsic valuation. The trader who thinks he can pick tops and bottoms has a built-in self-defeating character flaw. That trader is selfish. He wants it all, from top to bottom, or Bottom to top. Selfish is different from greed. Greed never has enough. The greedy trader stays in too long hoping for more. The selfish trader wants it all for himself, not willing that anyone else can have their piece of the market.
A holy man was a day to converse with God and asked him: âLord, I'd like to know how are the Paradise and Hellâ. God led the holy man to two doors. He opened one of the two and allowed him to look inside. At the center of the room, there was a large round table. At the center of the table, there was a huge tray containing food from the delicious scent. The holy man was hungry. The people sitting around the table were thin, with a livid and sick. They had all the air hungry. They had the handles of spoons long, attached to their arms. Everyone could reach the plate of food and collect a little bit, but because the handle of the spoon was longer than their arms, they could not approach the food to the mouth. The holy man trembled at the sight of their misery and their pain. God said: âYou have just seen hellâ. God and man headed toward the second door. God opened it. The scene that the man saw was identical to the previous. There was the large round table, looking at the tray he was hungry. People around the table also had the spoons with long handles. This time, however, people were well-nourished and happy and talking with each other, smiling. The holy man said to God: âI do not understand!â âItâs simpleâ replied God, depends only on ability. They have learned to feed each other while others do not think that to themselves. Heaven and hell are identical in structure .... The difference makes each of us!
Some traders have natural tops. http://news.medill.northwestern.edu/chicago/news.aspx?id=114605 FWIW: I doubt this poster is Jow Ross the guy from trading educators but regardless. If one knows the legs, retraces of trends as they should, ROSS HOOKS will make you a pile of cash. Hooks are signals to only be used if the trend is showing it wants to continue. how you figure that out is up to you. Keep your trading simple as simple trading is. http://news.medill.northwestern.edu/chicago/news.aspx?id=114681
All I know is I have been trading for over 10 years, proffesionaly, and that the majority of REALY talented traders who wiped out were bottom fishers, and a few top fishers.
"Fear and greed drive markets. That's why to succeed as a trader, you must learn to respect the two principal driving forces of price. To win consistently, you must put the odds in your favor by understanding when sentiment reaches an extreme at either end of the scale and take advantage of the markets at that time." --Boris Schlossberg, author of Millionaire Traders: How Everyday People Beat Wall Street at its Own Game "There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion that always gets in the way of human intelligence. Of this I am sure." --Jesse Livermore "Be fearful when others are greedy and greedy when others are fearful". --Warren Buffett, Oct 2008 on buying US stocks for his personal portfolio in the Oct. 2008 stock market environment. Once you understand how to properly measure greed and fear, you will have the tools to prosper in auction markets. Buying at market bottoms when fear is at an extreme is an aquired taste that most people never attain.
The psychology of picking tops and bottoms is exactly why the strategy fails. Picking tops and bottoms with a firm understanding of market characteristics/price action along with smart money management/stops is possible but again the thought process of the strategy goes against smart money management. Why? The reason is because a trader may think the market is oversold at 30. He will go short and a few hours/days later the market hits 35. The trader thinks to himself wow the market is even more over sold, what a great opportunity to make more money! The other problem is that sometimes the price may rise very high up and than actually turn around and go the traders way in the end. This will in turn make his money management even more faulty because the idea of using stops now would just be waste of money if the trader stubbornly convinces himself that the market will turn around. Small positioned weekly swing traders may do fine with this strategy if they have smart money management but if your going all in everytime your bound to screw yourself.