emeraldorc:
I have to agree your observation has been debated by all the best traders, for example Paul Tudor Jones a futures trader likes to pick tops and bottoms, if you try trading the S&P 500, it is a manageable trade and you can essentially look to short the S&P 500 if the index has pushed a certain high, e.g. in the last 3 weeks the S&P 500 was over the 2000 point mark, you didn’t need to be genius to short once price stalled, well the S&P fell to 1960 before ranging at $50 per point per contract held on the futures contract e-mini and $250 on the normal S&P index, you can see why as you get more liquid in trading FX will take a back seat and your theory of sell high and buy low will make sense. If on the other hand you trade a 30YR T Bond future, you will be looking at $1,000 a point and the T Bond moves usually in one direction for ages with minor blips, in this scenario buy high and sell low doesn’t make much sense, at this level 1-2 points is normally great for most bond traders who would hold several contracts or even 1 contract most only risking a quarter of a point.
If you trade currencies of course calling the top or bottom is okay as long as you are aware that you will be stop hunted, it makes sense to confirm moves and with the level of institutional piggy backing, it makes sense to trend follower, in this case if price goes higher on good volume and momentum, then you should buy rather than expect the top. The commodity futures market normally has several reasons to call tops and bottoms e.g. oil is allowed 10 point either side of the price before being called limit up or down essentially trading ceases and you are stuck with your position till the next day in which case price could open lower or higher, if you are limit up, most traders will take profit the next day in which case price tends to open a little lower, the other reason is that most commodities have predictable tops and bottoms since their price affects real world prices of food on our shelves. Equities on the other hand is dependent on volume and the real supply and demand in this market the aim is to buy a stock cheap and sell it at a higher price and generally has a long bias as the short side is usually buyers liquidating their positions, so it is never a good idea to pick tops because a stock specialist will happily by their own stock just to entice buyers into the market so they can liquidate their position so artificially will move the price up above your top and since a stock can rise to infinity as long as people will buy it so perhaps not a good idea.
Anyway my point is it depends on the market and the movement you are playing for. The book Market Wizards has various top traders arguing the same point, however they are all billionaires and multi-millionaires and they play in all kinds of markets.
Hope this gives clarity.
Great post!!
I agree… equities/stocks CAN rise to infinity…
There is a wonderful trading video that John Kicklighter (Chief Strategist at DailyFX) posted the other day, which I want to share with you all, talking about trading reversals (or, to use a dirty phrase, ‘calling tops and bottoms’)!
Enjoy…
VIDEO