The Trouble with Calling a Bottom
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".
Good Trading!
Bill Kraft
October 11, 2008
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
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