Trying to time the exact bottom or exact top is one of the biggest mistakes new traders make. You will always see traders on Twitter sharing their bottom tick or top tick prints. But what you do not see is the 5 losses they took on the way down trying to guess the bottom, and how they still ended up red on the trade.
Learning to capture the meat of a trending stock on an intraday or daily timeframe is a crucial skill for all trading styles, not just counter-trend trading. Every time you trade a stock, you should not go into the trade with the expectation that your entries or exits will be at the top or bottom of the move. Here are some tips on how you can participate in big market moves without trying to pick a top or bottom:
Scaling is my favorite technique for capturing the meat of a stock’s move. Scaling is a technique where you sell or cover your position in portions, instead of all at once. This allows you to take profits, and also keep yourself in a position to capture a bigger move in the market. You can also use scaling for entering stocks, as you can take partial positions, and then add more shares once you get confirmation of the stock trending in your favor.
Do not let scaling into a position turn into averaging down on a loser. Make sure to always have an entry and exit plan when you are scaling your positions, so you know exactly when you will add more to an existing position or reduce your position size. Have a plan for w
Know The Stock’s Range
Before day trading any stock, you should know how much it typically moves in a normal trading day. This will allow you to set realistic expectations on where the stock could end up if it started trending to the upside or downside. For example, it would be unrealistic to short SPY today at $280, and for it to fade all the way back to $270 in 2 hours.
Even on its most volatile days, it will rarely move more than 1% in either direction. If you were to trade it (maybe through options due to the lack of the ETF’s volatility) you would not take a position expecting it to dump 3%. Knowing where a stock might end up will allow you to capture a big portion of the stock’s move without giving back unrealized gains.
The SPY did end up dumping a little more than 3% on the chart above. However, you would not take a position expecting that kind of move. What a good trader does is take profits at key support areas, and leaves some shares on for the bigger move in the stock. Trading for a career is not made by going for homerun trades every opportunity.
Let The Bottom/Top Pick Itself
When you get into counter-trend trading, you cannot fall into the trap that something seems “too oversold” and must bounce, or “too overbought” and must pull back. So many markets moves have exceeded everyone’s expectations to the long and short side. Picking tops and bottoms is a fool’s game.
Instead, let the stock end the trend its on, and then join once it is obvious the trend has changed. You can still get a nice gain on a stock bouncing or pulling back without catching the exact top or bottom. Jessie Livermore said it best: “ Give up trying to catch the last eighth – or the first. These two are the most expensive eighths in the world.”
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