Attempting to Pick Tops and Bottoms in Day Trading

Once we have an understanding of some of the common problems that plague beginner traders (not using a demo account, over-leveraging, starting with unrealistic expectations), it makes sense to start looking at typical mistakes made by those in the intermediate/advanced categories. One clear example here can be seen when traders feel as though they have the ability to time the markets and identify exact turning points in asset prices. This can occur once an investor has a string of profitable trades and becomes over-confident in their skills and will then attempt to pick tops and bottoms in the market.

The reason that many traders attempt to do this is clear: It allows traders to buy in at the lowest levels and to sell into the highest price levels. One of the most famous market maxims is that a successful trader is always looking to buy low and sell high. But there are potential problems at hand when we are looking to pick market tops and bottoms: “While this might seem like a strong strategy on the face of it,” said Haris Constantinou, currency analyst at TeleTrade , “traders must always remember that nobody can predict what will happen next in forex pricing.” That is to say, there is no way to pinpoint the times at which a trend (either upward or downward) is coming to an end.

Good Idea, But Difficult in Practice

Picking Tops and Bottoms in the forex market can be a very difficult (or impossible) prospect, as it involves siding against the majority momentum that has taken place previously. For example, if a currency pair is seen in a strong downtrend, some traders might start to buy in, using the expectation that prices have become too cheap and will soon reverse. But the problem here is that you are fighting a significant amount of market momentum, and finding an exact trading area for the turning point is a low probability practice. Remember, the forex market is still the largest trading market in the world, so once its investors start building on a trend it can be very difficult to “turn the ship around” and reverse the trend.

So, instead of buying in as prices are dropping, traders should look for additional evidence and only buy a currency once an uptrend can be been seen on the shorter term time frames. It is true that you will sacrifice some of your profits (because you will not be buying in at the optimal levels) but these trades will have a higher probability of success and there will be fewer cases where you are forced to stop out your trade at a loss because you decided to fight the overall market momentum. Key indicators here can be seen in price breaks in areas of prior support or resistance. Another important element to watch for is the violation of trend likes that market the previous impulsive moves.