How I Pick Price Tops and Bottoms

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How I Pick Price Tops and Bottoms

Trying to pick tops and bottoms is taboo in the financial industry. News anchors, columnists and even many text books tell you not to do it. I agree and disagree. The reason picking tops and bottoms can be dangerous is that often there isn’t any sort of strategy; the trader just “thinks” a top or bottom is forming and then jumps into a trade. That will likely lose you a lot money. What I propose is a strategy for picking tops and bottoms where the market provides us with evidence that a turn is occurring. Here’s how to do it.

Not the Exact Top or Bottom

The strategy or analysis method I use for picking tops and bottoms won’t get you in at the exact bottom or top. Trying to pick the exact top or bottom is what gets people in trouble because at the exact top or bottom there is no supporting evidence from the price that a turn is about to come.

Therefore, I want to get into trades very close to a top or bottom, but not right at it. This is accomplished through gathering evidence of where the price may potentially top or bottom–such as at supply or demand levels–and then waiting for the price to confirm my suspicions. Sometimes it will sometimes it won’t, which is why we wait for the price confirmation before making the trade.

To pick a top or bottom there are only two things I need to do:

  • Locate in advance supply (for a top) and demand (for a bottom) levels, and mark them on the chart. These are areas where the price is likely to reverse…but I don’t assume that it will.
  • Wait for the price to form a small consolidation near a supply or demand zone, and then to break out of that consolidation. If this occurs at a supply level, the breakout and trade should be to the downside (short sale or put). If this occurs at demand, the breakout and trade be to the upside (long trade or call)

This strategy can be used in a ranging market, but generally I like to use it in trends. Trends are typically easier to trade since I will only take the trades that are in alignment with the overall trend. Therefore, in an uptrend, I am looking for bottoms to go long at (calls), and in a downtrend I am looking for tops to short at (puts).

Let’s look at a couple examples of what I am talking about. First the uptrend. We find an asset in an uptrend, and then isolate supply and demand zones. These are basically strong resistance and support levels (for more on supply and demand zones see: Supply and Demand – Key Technical Trading Level). You can also draw a trendline along the trend, although I find trendlines are less reliable than the supply and demand zones.

The chart below shows an uptrend, which extends much further back than the chart shows. Therefore, I am looking to go long (buy calls) at bottoms in the uptrend. Figure 1 shows the first step where I put some supply and demand zones on the chart, based on prior price action.

Figure 1. USD/CAD Demand Zones

In this case the price doesn’t reach the demand zones. This is typical in a strong trend, and provides evidence that we are trading in the right direction by going long.

The next step is how we get into a trade though. As the price approaches a demand zone we want the price to consolidate. Then we are simply watching for the breakout back in the trending direction. When that breakout occurs, enter long (buy calls). Now these consolidations aren’t going to always be symmetrical and pretty; sometimes a range will develop, other times it will be very choppy.

In Figure 2 I have drawn some lines which contain the consolidation which often occurs “at the turn.” Once the price starts turning back toward the trend direction (via breakout), enter long.

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Figure 2. USD/CAD Bottoms Picked.

As you can see, by entering as the price breaks above the upper red line in each case, we aren’t getting in at the exact bottom. But it is about as close as we can get while still having evidence to support the trade.

For a downtrend we look to establish supply zones, and then as the price approaches it we want a consolidation to form. Mark the consolidation and if the price breaks below the consolidation enter short (buy puts).

Figure 3. Silver Top Picked

Silver had a strong downtrend at this time, so I was looking for short (buy put) trades. I established the supply zone in advance, as the price pushed toward it I marked the consolidation and when it was broken to the downside I went short.

Establish some supply and demand zones, then wait for the price to move in the anticipated direction before taking a trade. For a trade to occur those criteria must occur–the price is in, near or doesn’t reach the supply/demand zone, and then the price breaks the consolidation in the trend direction. Ideally only trade with the trend, and while you won’t pick the exact top or bottom, you can get pretty close while still taking a trade based on solid evidence.

The 2 Best Trading Methods For Picking Tops And Bottoms Of Prices (Market)

I’ve tried everything…to find the best way or trading methods for picking tops and bottoms of prices in the beginning.

You can say that I was searching for the holy grail of forex trading.

I spent countless hours studying the wrong things. In the end, it gradually dawned on me that I just needed two things…actually two methods.

And these two trading methods do have the potential to help you to find tops and bottoms of prices or market.

Stop Wasting Your Time Trying To Pick Tops And Bottoms Of Prices…

That’s what you hear or may read in many trading websites on the net but my biggest question is this: do they really know what they are talking about?

Honestly I don’t think trying to pick tops and bottoms is a useless trading endeavor.

As a matter of fact, it is really worth it because the rewards for being right can really increase your forex trading account immensely and can make up for all the trading losses you may have previously.

Method #1: The Market Already Shows You

This is so obvious, its really funny.

As a matter of fact, it happens everyday on your charts and you may not have really cared at all simply because that’s not what you were looking for.

You see, the market has already revealed to you the tops and bottoms of prices.

Support and Resistance levels!

How many times have you observed a support level and price has gone down to it, hit it and bounced back up 200-1000 pips?

Lots of time I believe…

Why didn’t your trade it then?

You see, the market already showed you the bottom…so next time price goes down to that bottom, pay attention and look for a price action trading signal to buy:

Similarly, if market showed you a resistance level, then obviously, that’s your potential top. If price starts turning back up to it, you better take notice and look for price action signal to sell.

Method #2: The Trendline

If you don’t know how to draw a trendline , you better.

Trendlines are definitely one of the very powerful way you can pick tops and bottoms.

To just give you an example, see the chart below:

So How Do You Know If Price Hits A Resistance/Support or Trendline That It Is The Right Time To Buy Or Sell?

Do These Two Methods Work All The Time?

Nothing can give you 100% win rate.

So what’s the greatest advantage of these two methods then?

Risk:Reward…that’s the greatest advantage.

Don’t forget to tweet, like or share. Thanks

How to Pick Tops and Bottoms With the COT Report

As you would’ve guessed, ideal places to go long and short are those times when sentiment is at an extreme.

If you noticed from the previous example, the speculators (green line) and commercials (blue line) gave opposite signals.

While hedgers buy when the market is bottoming, speculators sell as the price moves down.

Here’s that COT report chart again:

Hedgers are bearish when the market moves to the top while speculators are bullish when the price is climbing.

As a result, speculative positioning indicates trend direction while commercial positioning could signal reversals.

If hedgers keep increasing their long positions while speculators increase their short positions, a market bottom could be in sight.

If hedgers keep adding more short positions while speculators keep adding more long positions, a market top could occur.

Of course, it’s difficult to determine the exact point where a sentiment extreme will occur so it might be best to do nothing until signs of an actual reversal are seen.

We could say that speculators, because they follow the trend, catch most of the move BUT are wrong on turning points.

Commercial traders, on the other hand, miss most of the trend EXCEPT when price reverses.

Until a sentiment extreme occurs, it would be best to go with the speculators.

The basic rule is this: every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme results in a market top or bottom.

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