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Chapter 9. The most valuable technical t... > Bottom pickers versus trend follower...

Bottom pickers versus trend followers

Some traders say they are able to pick tops and bottoms with some accuracy, and there are certain indicators (the RSI, for example) and various patterns (the key reversal, or engulfing lines in candlestick charting) that are designed to do just that. No doubt that the trader who can pick tops and bottoms with any degree of success will make the most money; however, I've found in practice that this is a very (repeat very) difficult thing to do over time. Anyone who trades long enough might be lucky and catch a major top or bottom. I can remember two cases in my career (in more than thousands of trades) in which I've been lucky enough to catch one: one in soybeans and one in copper. I'm not talking about a daily high or low, or even a weekly high or low, but a major (yearly or quarterly) top or bottom. I'm talking about the contract high or low published in the papers and in historical charts. Catching one of these is an almost impossible thing to do, because in hundreds of trading days every year, there is only one major top and only one major bottom. For that matter, even minor tops and bottoms (that is, daily or weekly highs and lows) are hard to get, because they are the exception and not the rule. For example, during any two-week period, every market has its top and its bottom price, but how many thousands of other trades take place even in this fairly short period of time? There's an old trading adage that goes something like this: Bottom pickers get their hands slapped. As W.D. Gann has taught us, no matter how cheap or how expensive a market might appear, it's never too cheap to sell or too high to buy.

As a result, I've found it much easier and, therefore, ultimately more profitable to take a chunk out of the middle of a move, which is what moving averages are designed to do. Moving averages are trend-following tools. This means they do not anticipate the market; they lag it. Moving averages are designed to help determine two things:


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