By: Evan Lazarus
There is nothing more elusive (and also satisfying) as placing a trade at the exact low or high of a move. It’s as if some magical wizard will highlight your equity with an asterisk, announcing to the world, “that you did pick the exact spot.” There ought to be a bonus prize for the few traders who actually do this, but alas there is none.
From the minds of two of the greatest trader’s who ever lived comes some savvy information on the subject. Amos Barr Hostetter, one of the founders of Commodity Corporation, used to remark that once you’ve picked that exact point where the market will turn, just add another 30% to the move and wait. This is sound advice.
In the past twenty or so years few traders have experienced the success of Paul Tudor Jones! Mr. Jones exploits in the markets have reached the legendary status they deserve. My personal favorite tidbit is from an article in the WSJ when he was interviewed on his trading. The reporter was very excited by P.T.J.’s recent success in the Treasury market. What follows is a paraphrase of that interview. The reporter said to P.T.J. that he must have been elated that he picked the exact low day to but T-bonds before they exploded to the upside! Mr. Jones replied that the statement was only partially correct. He said a more accurate statement would be; “Paul Tudor Jones correctly forecast the recent low on his last five attempts!” You can rest assured that P.T.J. had a firm grip on the risk assessment on all of those trades. His approach to risk control is what makes him a great trader (“a market wizard”).
So you still want to pick a top or bottom? If so then you must define what you are willing to risk and stick to that plan but what I can tell you from experience is that this style of trading is more or less a waste of time because even the “wizards” only get it right 20% of time and for the rest of us non-wizards the VERY best in the end is still a zero sum game. I have made many bad trades in my life and the vast majority of them have been trying to be a hero.
I have learned from my mistakes.
