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Market Tops and Bottoms: How To Time Them Up


December 7, 2020
The foreign exchange market is not all about buying low and selling high. Continue reading this article to get an in-depth look at how to trade market tops and bottoms.
Market Tops and Bottoms: How To Time Them Up

What do you need to Know before Starting?

Many investors think that if you cannot identify the exact time for market tops and market bottoms in the Forex market, you don’t stand a chance in timing the market. Therefore, they believe that avoiding global market timing will be better.

This is false. It might seem impossible to buy or sell at an exact market bottom and market top. However, it’s pretty much possible to time your exits and entities to reduce your risks and raise your returns.

For some, they are okay with giving up 1/8 of the top and 1/8 of the bottom. For just about any move while timing the market. This means that instead of trying to capture exact turning points in the FX-market, you should put your main focus on trying to capture the 75% of the move that is remaining. This will form the meat regarding every trend.

This is relevant while trading in any market, such as commodities and forex. It is also flexible on any timeframe like intraday trading, swing trading, position-trading, etc.

How Can New Investors Pick Market Tops and Bottoms?

market tops and how you can use them when trading forex

There are two strategies that beginners can use while identifying market tops and bottoms.

1. Technical analysis

This analysis is a fundamental analysis that mostly works to show you what exactly is going on. It’s recommended not to use data from someone else’s technical indicator as an isolation factor, especially for novices in FX-trading. A perfect example of this is RSI.

The relative strength index is one of the most-used technical indicators that investors use while identifying market tops and bottoms before deciding to invest money in currencies or the stock market.

It’s commonly said that when RSI gets to 70, it means that the concerned asset has been overbought. When the RSI hits 30, this means that the asset in this context has been oversold. These levels are signals for great turning points.

However, going unknowingly with this logic will result in you blowing up all your money within a short time. The reason behind this is that markets can continue being overbought and oversold for a long time. For the case where the euphoric bull market surpasses its highs, RSI levels can go beyond 70.

Indexes can also fall drastically below 30 and be stagnant for a long period in the forex charts, as many market veterans have witnessed. If you rely mostly on RSI to identify market tops and bottoms, this could indicate a rough ride ahead.

2. Be keen to spot divergences

If you are using RSI and don’t wish to rely heavily on the numbers it produces, you would opt to point out divergencies between numbers generated by the RSI indicator and the price results action. This method is much more reliable when trading market tops and bottoms.

RSI indicators are legitimate trading strategies that apply to all markets. While using RSI divergencies, first sell trading signals do not occur when the RSI breaks the 70 marks. If there is a new high in the price, the RSI does not follow suit but instead sets a lower-high. It means the price move is losing steam in terms of its strength, meaning a reversal is pending.

3. No need to capture both sides.

When you try to catch both market tops and market bottoms, it might double your risk and failure possibilities. FX trading’s long and short aspects are very different styles that need unique skills and mindset combined.

It’s advisable to choose the side you are comfortable with and focus on it. For instance, if you are a long trader, focus on choosing bottoms and let the short-sellers deal with market tops.

On the other hand, short-traders should focus mainly on picking market tops and let the bottom-fishers deal with the oversold conditions.

Differences Between Long and Short Trades

market tops and the difference between long and short positions

Going long or short implies whether a trade is made through buying first or selling. Going long occurs through buying to sell at an even higher price later on to make a profit. On the other hand, going short occurs through a Forex trade that involves selling before buying with intentions of buying the stocks again but at a much lower value to make a profit.

All about going long

 

When dealing with a long trade across any trading platforms, it means you want to buy an asset, and they want to sell it when the price hikes. There is a common use of terms such as ‘buy’ and ‘long’ during transactions in day-trading.

Some trading software has trade entry points marked with a ‘buy’ icon. In contrast, others marked with a ‘long’ button. These terms often describe open positions. For instance, if someone refers to himself as ‘long apple’, it means that they own shares of Apple.

  • Long trade potential: Investors usually say they are going long as a way of showing interest in buying a certain asset. For instance, if you go long on AB stock valued at $10, you will have to pay the transaction costs of $10,000. If by any chance you get to sell the shares at $10.20, you will earn $10,200, making a profit of $200 excluding commissions.If you are going long, then you will be contented with these results. When going long, interest rate potentials are not limited because prices of assets can rise significantly. Day traders are always working round the clock to ensure they keep risks and profits stable they also work to gain profit from several small moves to avoid imminent price drops in Forex rates.

All about going short

Most novices will be confused when shorting a stock. This is because, in real-life situations, we buy assets to sell them. Day investors involved in short trading will sell assets before purchasing them, hoping that the prices will fall. They gain profit when the price they paid for is lower than the one they sold for. While trading in the financial markets, you can either sell then buy later or buy then sell.

You can use ‘sell’ and ‘short’ terms often.

Like long trading, the foreign-exchange software used for market tops & bottoms short trading has entry points marked with ‘sell’ icons and trade entry points with ‘short’ icons marked on them. ‘short’ mainly refers to open positions. For instance, if you refer to yourself as ‘I am short SPY,’ it means that you have a short position in SPY. Going short means that you are shorting an asset. In simple terms, you wish to sell an asset that they are lacking.

  • Short trade potential: For instance, if you go short on 100 shares of AB stock at a value of 10 US-dollar, you will earn USD 1000. This money is not yours yet. In your broker account, it will show that you have 100 shares. You will have to bring that balance to nil by purchasing at least 100 shares. You won’t be able to know your profit or loss position until you do so. When going short, your profit is limited to the money you received initially on the sale. However, your risk is limited since the price could rise. Selling short allows experienced investors to make a profit regardless of the position of the market.

For you to go short, it means that your Forex broker has to borrow shares from another person who owns them. If he/she is not in a position to borrow, he won’t allow you to go short. Stocks that have just begun to trade are known as Initial Public stocks and are not sortable.

Market Tops & Bottoms Conclusion

While carrying out long or short trading, you need to be mindful of the psychological differences involved. Forex trading both sides of market tops and bottoms is not quite impossible since most investors do so.

The most important point here is that stock markets are full of probabilities. Your main priority has to be focusing on making the most out of your edge and making sure you minimize everything that might cost you to spend extra money.

In Forex, not everyone can catch the Market tops and bottoms. Have a priority on what you are best at and put all your focus on it. Moreover, be specific with the trade setups that you want to use.

Sources


Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

Categories: Trading , Analysis

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