Why Picking Tops or Bottoms is a Fool's Game

09/26/2012 4:20 pm EST

Focus: STRATEGIES

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

Traders often look for tops and bottoms when markets have been trending in one direction for a long time says Boris Schlossberg, who discusses a more effective way to make money.

My guest today is Boris Schlossberg and we’re talking about a mistake that traders make in terms of following momentum.  So, Boris, let’s talk about how you can follow momentum and trust the market’s flow. 

Well, I think the biggest mistake that traders make generally, especially novice traders, is that they always want to outsmart the markets.  So for example, when you’re in a big rally and this happens, by the way, universally through all of the markets, FX, capital markets, equity markets, same kind of a thing.  For example, right now, the equity markets are rallying and everybody hates the rally.  Everybody thinks the rally is completely overdone and they all want it shorted.  Same thing with the euro.  The euro went to 130 and almost everybody on my Twitter feed, said, oh this is absolute top, it’s ridiculous, I want to short this currency pair.  When in fact the much more intelligent trade is to actually follow the momentum of the market because the market actually signifies something very important and telling you something underneath is going on that could really help you move in the right direction.  And I think that’s they key thing.  It’s very, very hard to trust the momentum of the crowd, but many times it’s much more profitable.

People are always trying to justify in their mind why something is at a top or a bottom and trying to pick a top or a bottom.  When actually, you’re much better off trying to pick that meat of whatever move it is, whether or not you think it’s right or wrong. 

Correct.  Also, the tops and the bottom will become evident when it begins to turn.  You don’t have to be the first one to try.  In other words, when something turns, it takes more than just a day or two for the market to turn and you’ll be happy that you’ll be able to take advantage of that.  But trying to figure it out ahead of time is usually always a sucker proposition.

Alright, so does this argue then to ignore the news entirely?  No matter how bad the news is, if it’s going up, I should be long.

Well, I think the argument here is not so much as ignoring as to trust the price action primarily and then sort of understand where the news fits in underneath that.  Because frankly, the news can very often be interpreted positively or negatively depending on how you interpret the information and it’s the price action that is really the dominant factor here that’s driving the direction and I think that’s what you need to trust.

Alright.  So just wait for the market to tell you what the next move is rather than try to anticipate it?

Yeah.  It goes back to the old statement of professional traders, trade what you see not what you think.  I think that’s always good advice.

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