Absolute Top

Don’t buy tops or sell bottoms

Back in 2001, when I was learning how to day trade, I was always told never to buy tops or sell bottoms but instead to enter on the pullbacks as that is how to make money from the markets.

This post is not intended to dismiss the above logic but more to get traders to think about how logical the above statement actually is.

As many of the Dynamic Traders work, so do not have the time or inclination to sit and watch the screen all day, most trade predominantly on daily time frames.  In order for a trend to be in play on that time frame, tops (resistance levels) or bottoms (support levels) need to be broken. Without these points of reference breaks, price is in a range. As trend traders, a range bound market means no trading.

When there is a trend in play, trend traders and most other types of traders, will want to take advantage of price increasing or decreasing in order to gain profit by going long or short respectively.

How do we know when a trend is in play?

The most obvious method of determining a trend is to identify higher highs and higher lows (for a bullish trend) or lower lows and lower highs (for a bearish trend). In order to have higher highs or lower lows, price needs to break resistance or support levels. Prior to breaking these points, price would have either a top or a bottom.

Below is an uptrend example.

bullish trend

Below is a downtrend example.

Bearish trend

On the chart below I count approximately 10 tops. This is MAR – which Dynamic Traders have been buying into on the break of resistance for some time. Had we followed the logic of not buying tops then this would have been a very poor performing trade. However, understanding price action and knowing how a trend is constructed, buying MAR on the breakouts has been quite logical and trading the trend has been quite simple.

 

Resistance breaks

Had we not traded at the tops or if we went as far as to short at those points, and made even a little bit of profit by some huge amount of luck, by going against the trend we would have had to work very hard and watched the chart continuously – and no doubt would have been very stressed throughout the process. Instead, Dynamic Traders trade with the trend and embrace the pullbacks in order for the tops to be formed so that compounding positions can be entered.

Trading when price is in a trend and standing aside when price is devoid of a trend is actually very logical. This means buying above resistance and shorting below support is a very clear and simple way to enter into a trend.

Good trend trading…

Javid Shaik

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