3 Things to Consider When Picking Forex Market Tops or Bottoms

Market players regularly lose their trades and even undermine their accounts by insisting on shorts at the “top” and longs at the “bottom”.

In fact, while it’s not the number one cause of death for traders, I’d say it’s still high on the list.

Don’t get me wrong, I definitely understand the appeal of trying to pick a top and a bottom.

The promising risk-reward ratio is too tempting in itself, especially if the setup is supported by the underlying technical levels.

Unfortunately, many traders choose tops and bottoms not for fundamental or technical reasons, but for the simple pleasure of being right.

After all, who doesn’t want to share with their friends that they went short at the top or went long at the bottom of a strong move?

But just because picking tops and bottoms offers a good risk-reward ratio doesn’t mean everyone should jump at every opportunity.

Here are some things to consider when choosing a top or bottom:

Most of the time, you really don’t look up or down.

Ask any professional trader you know and he/she will tell you that picking a top or bottom is like catching a falling knife or standing in front of a speeding truck.

Come to think of it, they usually end up with the same bloody results (at least for your forex trading account).

A good explanation for this is that there is a good chance that the technical levels you are looking at are not what other traders are watching.

Also, other trend-setting factors (sentiment, fundamentals, etc.) may still be at work at the time you think a pair is forming a top or bottom.

The need to be right increases the danger of poor risk management.

Trying to predict a reversal can be difficult, especially since you know deep down that you’re going against the tide.

In countertrend trading, it’s easier to mistake a long-term pullback for a shorter-term “reversal.”

Even more damaging is the misconception that you can beat the market by knowing exactly where it will turn. This causes many traders to deviate from their trading plans, setting tighter stops than usual and not allowing their profits to grow.

Trading against the trend requires experience

While there are times when both fundamental and technical analysis hint at a reversal, there can never be a guarantee of exactly where the market will turn.

Not having enough breathing room for such potential reversals can hurt your account in the long run.

Perhaps that’s why some experienced traders warn against picking tops and bottoms. Trading against the trend requires a lot of market experience, but even some professionals recommend that 90% of your trades follow the trend.

With a lot of experience and after doing your homework, picking tops and bottoms is a pretty good trading technique.

Just remember to practice good risk management and give your trade enough leeway in case the market turns a little further away from your predicted pivot point.