Wednesday, May 22, 2013

Is the top in?

The most uncomfortable part of trend following is the giving back of profits when a trend reverses and finishes. This is where inexperienced traders can suffer. If they are not careful, they can fall into the trap of trying to time the end of a trend.

What normally happens is that, there may be sitting there for a day or two thinking they've exited right at the extreme of the move, only to see price move back in the direction of the prevailing trend. This leads to frustration as those traders are now on the sidelines.

No doubt there have been plenty of traders who have tried to time their exits on this uptrend at various times since the start of the year. This approach would have led to repeated losses. Far better in my opinion to trade small, not try to pick tops and bottoms in the markets and to follow price action.

The price movement on the indices today will no doubt have plenty of traders again thinking they caught the top of the market, with their newly established short positions having gone quickly into profit. Who knows if they are right? Who's to say that the market won't recover and be back at new highs within a session or two? I don't know the answers. All I do is follow the trend, and avoid this intra-day noise or volatility.

It takes more than one day to show a reversal of a trend, and at the moment we are nowhere near seeing such a signal being given.

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