When the market was trending downward in December many traders were anxiously trying to catch a turning point. They knew that a big bounce was sure to occur and they didn't want to miss it. They tried over and over to predict the bottom and many were stopped out multiple times when their timing proved to be incorrect.
Currently we are seeing the direct opposite of that sort of action. The market has been trending strongly upward for a couple of weeks now and there are many traders that are convinced that a sizable pullback is going to occur soon. The bears keep getting stopped out as the indices go straight back up without regard to overbought conditions or overhead resistance.
If a trader can time one of these turns with a fair amount of precision the pay-off can be tremendous but there is one mistake that they make over and over - they are too early.
The mistake of being too early occurs when there is too much focus on exact timing. If you try to pinpoint the precise moment the indices hit the lows or highs the most likely mistake is that you are too early and the trend continues.
If you are less focused on catching the exact turning point you can cut your risk substantially by making your move after a turn has occurred. It is far safer to arrive fashionably late at the party rather than to show up too early.
The benefits of jumping on a trend after it starts are obvious. You can control risks better by using recent higher or lows as stop points, and you don't have to worry about making up unrealized losses if you started to make your move too early. It is also easier to be more aggressive if you aren't already lugging a large position.
Most computer algorithms tend to work on this principle. Rather than go counter to the prevailing trend they stick with it. The programmers know that they can change course in the blink of an eye so there is no great benefit in trying to anticipate what the market might do. Just jump in when things change.
The main reason that so many traders try to call the exact turning point is ego. It is a suboptimal strategy but we have been influenced by the media to believe that there is great glory in being the expert that can predict these moves. A never of pundits have lived off the publicity of calling a major turn for many years. They never did it again but that didn't matter.
Never in the history of the market has anyone ever been able to consistently call major market turns with high precision over a long period of time. Many are lucky at times and happen to hit the jackpot and they confuse that good fortune with skill.
One you admit that it is not possible to call market turns with precision, and give up on seeking the glory of the 'big call', then strategy becomes easier. You don't jump in and hope the market gods smile upon you. Instead you sit back and wait for the character of the market to shift. You stalk entry points as you see clues that the price action is changing. You conserve your precious capital until you can act with greater confidence.
The best way to reduce risk is to embrace a trend only after it starts. Focus on being late. Don't let your hopes for a big score push you to keep fighting a trend that is going against you.
The secret to catching a turn is to focus on catching it only after it has already occurred.
This morning the indices are flat but a strong report form Bank of America (BAC) is helping financials and keeping sentiment positive. Bullish confidence continues to build as the market refuses to give back even a little of the recent gains.
