Picking a Market Top Without Scaring Yourself Silly

Originally published on Equities.com., October 4, 2016.

Picking a top, a bottom, or any market moves always seem to scare people. In many of the classes I've taught recently, I have noticed more and more fear regarding an upcoming market collapse. The fear that I see regarding this market collapse is typically centered on someone's reaction to what's happening in the news. Everything from the upcoming presidential election, the possibility of rising interest rates, the economic situation in foreign countries, global terrorism, and a host of other concerns have put many people on edge. If you find yourself in this situation or mindset, I will tell you the same thing that I tell every student in the Academy: Relax.

You don't have to fear the market. Learn to pick your trades with confidence.

Relax. The only thing any market truly reacts to are the buy and sell orders from institutional investors. Money managers, Wall Street firms, banks and institutions all have different ways of handling movements in the world, and how news will affect their buy and sell strategies. One thing that the average investor tends to do more than the banks and institutions is overreact to any one particular factor in determining their strategy. Banks and institutions have the foresight and ability to have more patience. As retail investors, we want to have that same patience.

So how can we pick a market top? The easy answer is that we can't. When we are at an all-time high, we cannot accurately find any leftover sell orders where price has moved in the past. As traders, our lowest risk, highest probability and highest reward entry points will come at or near the turn in price. This means we need to be able to time a market’s turning points in advance, and with a high degree of accuracy. The way that we time a market's turning points is essentially to look for the unfilled buy and sell orders that an institution leaves behind at a particular price level. The way we spot unfilled orders is by finding where price has moved from a state of balance, meaning there was an equal number of buyers and sellers, to a state of imbalance, causing a strong movement in price.

Typically, the origin of that movement will be an indication of unfilled buy and sell orders that remain. This means that in order to identify a markets turning points, price has to have been in a state of balance in the past to have a hope of timing where it may turn in the future. When prices are at an all-time high, it is impossible to have any indication of unfilled orders above us. Since there are no unfilled orders above us, it is not possible to time in market turning points with any true degree of accuracy and pick the ultimate top. So when do people get out of the market to protect their investments? Look for big picture demand on monthly charts. A monthly demand level is such a strong level that any breaking of those will make me change my sentiment from bullish to bearish. Until that happens (which a monthly level has not been broken since 2007), I will remain a bull for the big picture.

Overall, just don't let the noise of the news and all the other distractions keep you from participating in good markets, just learn to listen through the noise and listen to what the markets order flow is telling you.

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