This week completes our four-part series – 4 Secrets of Wealthy Traders.
In week one we focused on patience and allowing the trend to carry winning trades.
Then we explored a singular approach to trading… focusing on one market and mastering it tick by tick.
Last week the subject was pre-trade planning. Wealthy traders map out their days before the opening bell and know exactly where they want to do business in the market.
We conclude our sequence by revealing the final secret that the top traders in the world possess:
Secret of Wealthy Traders #4: They don’t try trading tops and bottoms.
Traders use a wide arsenal of indicators, studies, alerts and news to spot opportunities. But regardless of method, they’re all chasing the same force – momentum.
Momentum is what powers markets.
Whether it’s a biotech penny stock that popped on FDA approval or the Euro sinking in the wake of Brexit, the force to follow is the same.
The story hits news feeds. The ticker pops up on stock scans. And traders pour into the action, spiking volume and exacerbating the instrument’s move.
The biggest mistake traders make, especially novice traders, is that they always want to outsmart the markets.
For example, right now, the equity markets are rallying and everybody hates the rally.
Valuations are high… it’s a Trump bubble… rates are too low…
The reason doesn’t matter. They all want to short it.
But the more intelligent trade is to follow the momentum of the market.
Have you ever heard the saying, “The market is always right?”
Price action signifies something very important and tells us everything we need to know to move in the right direction.
This is key. It’s very hard to trust the action of the crowd, but most times it’s far more profitable.
Our minds instinctively want to justify why something is at a top or a bottom. We want to be smarter than the herd and buy the low tick.
But the money is made in the meat of the move, whether or not you think it’s right or wrong.
The richest stock investors in the world got to where they are by trading the meat.
In short – momentum is a wealthy traders friend.
Trading tops and bottoms will become evident when it begins to turn. It always looks clear in hindsight.
But it’s a fool’s game to be the first one in. It’s like trying to catch a falling knife. Picking major reversals is almost always the sucker position.
It goes back to the old statement of professional traders: trade what you see not what you think.
Momentum Example 1:
Here’s a weekly chart of orange juice futures going back 18 months. It was one of the best performing commodities of 2016.
Did you spot the low at 103.45? Did you have a feeling the market was about to turn higher? Do you think anyone did?
Of course not. No more than anyone called the 235 high.
But I guarantee you a lot of attempts were made along the way. I can hear it now.
“OJ was trading $105 six months ago. No WAY it gets above $170!”
Fortunes were lost in the orange juice pit last year.
But they were also made – by traders who knew to follow the rules and trade what they saw, not what they thought.
The money was made here, in the meat of the action.
No one snagged the low or got out at the peak. But even half the move was enough to generate a lifetime of profits for patient practitioners.
The commodity was clearly trading higher. The trend had been established and momentum was in force. Get long.
After kissing $235 to make new all-time highs, the market turned again.
You didn’t get in at the bottom. And you don’t expect to get out at the top. So once price action signaled a turn in the other direction – you cash out.
It’s not rocket science. But many trades spend years stabbing at hopeful reversals before finding this path of least resistance.
Momentum Example 2:
Here’s Bitcoin with 30-minute candles a few weeks ago.
Again, few people saw the turn as it was taking place. A tight-stop short would have failed a dozen times on the way up.
But after a sharp decline, consolidation and continuance… the verdict was in. This was a short play.
And after the low, the opposite occurred, signaling a turn higher.
But traders who followed the momentum and grabbed the “meat” of the trade had a rewarding day.
Final Thoughts on Trading Tops and Bottoms
Your time frame doesn’t matter. Scalper, day trader, swing or position – the pattern is the same.
And you’ll find it across all markets and instruments.
Buying the low tick or selling the high bid make for great stories. But the winners will be few and far between.
Markets can stay irrational far longer than traders can remain solvent.
Give up the pipe dream. Quit trying to catch a falling knife.
The market will show you when sentiment has changed. Be patient, go with the momentum, and pocket the meat of the move.