Trading Market Bottoms and Tops
Successful traders are well aware of the basic, fundamental differences between bear and bull markets. You can be improve profitable significantly by understanding the characteristic differences in patterns of these two basic types of markets. The principles I’ll be discussing here apply across every spectrum of trading - everywhere from stocks, to forex trading, to commodity futures.
Markets "fall" down, and "push" upward. Falling is effortless and usually a fast process, while pushing tends to be slower and more difficult. Something has to happen, there has to be an explanation for a market to progress higher and head towards the market tops.
Bull markets tend to be a long, planned out struggle to conquer the peak; as bear markets are more like a sudden, falling crashes that happen at the blink of an eye. In short (no pun intended), it seems much easier for markets go down than to go up and reach the tops.
Market tops present themselves as sharply pointed peaks – they're made quickly and abandoned quickly. Very rarely do you get a second opportunity to sell at the very top – double tops don't occur near as frequently as double bottoms. On the flip side, market bottoms usually occur as troughs – they take longer to form, and the bottom is often tested several times, almost as if the market is double-checking how solid the foundation is before trying to “build” anything higher.
A good rule of thumb to trade by is, “Bear markets tend to go lower, and last a little longer than you originally thought they would.” Traders attempting to “buy the bottom” commonly make the mistake of buying into a market too early, and therefore get flushed out for a loss in the final fall downward before the market turns back to the upside.
Most traders are generally taken by surprise when it comes to market tops. Even as rare as buying the bottom can be, it is infinitely more rare for a trader to sell at the top. If you have ever sold a position at the absolute top, consider it a gift. Market tops usually happen quickly, because once they've topped – and that blowout peak is hit, the market turns to the downside just as people begin to realize that the top has been reached, and “panic selling” slams the market back down.
A great example of this is VLTC on the Carl Icahn phenomena. It topped in April of 2015, then the panic set in. The stock went from less than $1 to over $21 in less than a month, but dropped $12 in only 2 days during the panic sell.
If you are a bull at heart, you should be aware of stop and stop limit orders. Better yet, if you owned VLTC at the time of the spike, a stop order may have saved you thousands on just one trade. Knowing how to use these orders can save you some pretty serious money in a panic selling situation.
Panic selling is always much stronger than panic buying. An easy phrase to describe this could be, “Bulls scare easier than bears.” History has shown us that bull markets are more fragile, and skittish than bear markets.
Finally, bear markets are not near as sensitive to news as bull markets. Even the smallest rumor can have a significant short term affect on price action in a bull market. On the other hand, bear markets are notorious for ignoring news, regardless of it being good or bad. I have seen traders on many occasions confounded when an unexpected, extremely bullish news release failed to have any effect on price during a bearish downtrend. Bears tend to shrug off the news, regardless of how significant. One bad news release can turn a bullish market bearish, whereas it could likely take several bullish news releases in a row to make a bear market even consider turning bullish. Because we understand this, we can take advantage of such over-reactions in bull markets, and non-reactions in bear markets.
Similarly, bear markets are much more susceptible to seasonal tendencies than bear markets. At times, it just takes a seasonal change to destroy a bull market and any market tops. As an example, despite how well gold might be doing on a longer term chart (monthly or yearly), it’s nearly impossible to get the price of gold to increase significantly between April and late June. A large number of institutional traders tend to sell gold to death during this time period, for no other reason than it has a very strong seasonal tendency to stay flat or go down during this time.
Conclusion
There are distinct differences in basic patterns of bullish and bearish markets. Recognizing these differences, and considering them when making trading decisions, will enable you to both minimize your losses and significantly increase your trading profits during these market bottoms and tops.
Labels: Trading Strategy
