Recently, I've heard a lot of chatter from various pundits about whether they are "calling a bottom" or not. Not surprisingly, some are saying we are at or near the bottom while others proclaim that we still have a ways to go. Who's right? Who knows? I believe the answer, as always, is: "No one knows." It is the same problem as with all prediction; none of us knows tomorrow's news.
Trying to pick a bottom can be a dangerous practice in trading. Naturally, we don't want to miss the turn and we know that there are going to be a whole lot of great opportunities when the markets eventually turn back up. If we decide that the market is at bottom and it is time to buy stocks, we could be wrong. If we do make that decision and begin to enter bullish positions, we would be well off to have a pre-determined exit just in case our belief was mistaken. I also suggest entering positions that are only a fraction of the size we ultimately intend to have. Gradually test the waters rather than diving in head first when we can't see the bottom. It is OK to miss part of a move. In general, entering once a trend is established can enable us to take a piece out of the middle. I've heard it said that we only catch one perfect top and one perfect bottom in a lifetime of trading. Whether that's exactly true or not, I'm sure you get the point.
When we are trading, we need to remember that we are at the right side of the chart. No matter what we predict, we could be wrong. Does that mean we shouldn't trade? For some, definitely. For those who really want success, they need to apply discipline in setting exits, in assessing reward to risk potential, and in managing money.
Personally, I think we have not yet hit bottom and even if we have or when we do there will be a retest after a bounce. That is what I think, but I can tell you unequivocally that what I think or what you think has no bearing on what the markets will do or on when they will do it. That is why we need to understand the need for discipline and create a trading plan that incorporates the elements I discuss in these articles and in "Trade Your Way to Wealth".
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
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