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If I had a dollar for every time I’ve heard a trading cliché, I could probably bail out the US Financial System myself!
Trade with the trend! Buy low, sell high! If in doubt, stay out! Manage your risk!
They all sound good when we’re sitting in a classroom, or when we are out of the market after taking a profit. But somehow they all seem to be forgotten when corrections and crashes come around.
One only needs to take a look back over 2 or 3 years on any currency chart to know that these kinds of moves have happened before, and will happen again in the future. But that doesn’t seem to stop everyone from panicking.
In these times, it pays to remember another trading cliché, this time from the master himself, WD Gann. Gann said that “the safest place to buy is the first higher swing bottom”, and “the safest place to sell is the first lower swing top”.
Chart 1 below shows the US Dollar / Japanese Yen (FXUSJY in ProfitSource). It has fallen just over 1000 points since the August 15 high, including a 500 point fall on Monday.
Chart 1
click to enlarge
Chart 2 below shows that this move has only been about half the size of a similar fall that occurred, starting from late December 2007. This puts the fall into a little bit of perspective.
Chart 2
click to enlarge
My Time Analysis was telling me to watch October 7 for a low, so with the market in its current position, its time to start sniffing around for a low.
This doesn’t mean we just jump into the market. With a sharp fall, it can be very difficult to pick an exact bottom, so it is generally safer to wait for the market to give a signal or a setup. In this case, we will look for a first higher swing bottom.
The hardest part is having the discipline to wait for that first swing bottom to occur. On the day of a large fall, such as Monday, as soon as the market starts to bounce off the low we start to wonder whether that was THE low, and whether we should be long.
Many a trader has gone broke trying to pick exact tops and bottoms, and while I have seen it done, and have done it myself, I have found that in the long run, it is more profitable to wait for the market to give you a signal first.
Chart 3 below looks at the low that formed on 17 March, 2008. By waiting for the first higher swing bottom, our entry did not come until 28 March – 11 days later.
Chart 3
click to enlarge
During those 11 days, you would have seen the market move several hundred points, and naturally would have been tempted to jump in. However, if you take a look at the market action over the next four months, you’ll see that you were still able to capture the bulk of the run.
So many traders go broke trying to capture that first 5 or 10% of a run, when there is much easier money to be made in the middle 50-75% of the move.
I’ll end with one of my favourite sayings, this one from David Bowden – “Don’t worry about the market getting away from you, worry about the market getting after you!”
Be Prepared!
Mathew Barnes
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