Have you had this feeling at times about an asset class you think you know very well, ‘Oh this has rallied too much, can’t go any further so let me short it’ or conversely, ‘ Oh this thing has fallen too much and there is value in buying so let me go long.’ I bet you have!
And sometimes you are right, but more often than not, you are wrong and end up losing money. What I have learned over the years and many thousands of hours of analysing charts is that we, specially the retail traders, are better off guarding against such a thought. Let us not stand up and try to call a top or a bottom for a market. Leave that job to the big boys i.e. the institutional traders. Simply because retails traders are very unlikely to have enough money to turn the markets – not even if all of them across the world were to pool in all their money together! Standing up against a flow thinking of catching that top or bottom may ruin your account very quickly. Take a look at the Spot Gold chart over last couple of sessions and notice the drop of 700+ pips on Friday the 12th April 2013 and continuation of a further drop of 900 pips by Monday morning the 15th April 2013.
Notice the green candles in between large red candles to the right of the chart? These green candles are the retails traders trying to call a bottom for the day or session. Only to be consumed by the big money selling further and driving the price to where it is when this snapshot was taken.
I bet many retail traders have hurt themselves in last two days on this market. If you are one of those, all I will say is dust yourself off, take a break, clear your head and come back another day. Trade only the set-ups that you know have better probability of working. And leave the job of finding tops and bottoms to the big boys with big money at their disposal. By the way, congratulations to those on the right side of this move!