A cyclical historyWe have all heard that the economy works in cycles, and so does the market. But what does this truly mean? Has anyone actually been able to show you where you can see these cycles occur? Well, here is a great graph that will show you how. By looking at the 6-month time frame, the percentages of stocks above the 20 daily MA, you are achieving 2 things.
Seeing price action at the timeframe used to declare technical recessions
Seeing the percentage of stocks in a short term uptrend or downtrend as the complement is also true
Here it's quite easy to see how an important world event unfolded with a clear, repeatable pattern. When the percentage oscillates heavily, it allows for many technical resets, causing a healthy uptrend when the percentage returns to above 50% by the end of the semester. Another patter is that after a period of over-performance, a period of under-performance is followed and vice versa.
When looking at world events, just remember at the end of the day we are all a number in a larger scheme. And the laws of statistics will end up controlling our outcomes, as there must be balance in all binomial systems. Even when biases can be present in distributions, the more we generalize and zoom out, the more we can see the statistical convergences in human behavior. At the end of the day, our lives are influenced by fractals, some of which we are not even aware exist.
Euphoria
No one catches entire trends. Start by OTP only a small part. Markets trend. Those trends can be divided in 3 + 1 phases:
Phase 1: Other names include Accumulation/Reversal/Wave 1
No one really know we are in phase 1 until much later.
Phase 1 is very often followed by a deep correction. This was spotted by Elliot (from Elliot Waves) as well as Dow I think?
From the market itself this appears to be true. We can see it for ourselves.
So we know 2 things, assuming those are true:
a- Phase 1 only truly materializes until the trend is well established.
b- Phase 1 very often will correct to 78.6% or more.
So clearly, catching reversals, assuming it is possible (it is but I think most pro's hate it and most retail only wants to do this), will realistically never let people ride entire trends. Assuming the goal is to make money not lose it being wrong all the time with awfully low RR.
Paul Tudor Jones said "For twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops."
Retail that has no rules no discipline and generally no clue are the ones that all absolutely want to catch tops and bottoms. The irony.
From OG's we often hear not to try to catch falling knives that no one can win but some people do it so it is possible simple proof.
Would I recommend it to the eager thirsty noob that think he will buy bottoms then sell tops? Yes, but just to have a good laugh.
The full PTJ quote is
"Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle.
Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops."
Some examples:
And so on.
What people think they'll manage:
What profiteers claim to provide to people that want to catch tops and bottoms
Bitcoin 2014 bear market => Starts with several big retraces.
Bitcoin 2018 bear market
Bitcoin 2019 top hunting
EURSEK I went for this reversal (chart is reversed)
And well... it did not continue... So good thing I got out!
Then you also have to greedy money grabbers.
Let it run, but not too much. It is not possible to get the whole trend out of it. If someone can do it then welcome richest person in the world.
Phase 2: Meat of the move/Wave 3
Things start getting positive/negative. That's really when things reverse into a new trend, and after it goes higher/lower than phase 1 participants start to notice and start thinking that it is possible we are in a new trend.
It is often the biggest part. The trend, with 1 being the start and 3 the end.
This is the most important and most lucrative one so I'm keeping it short here. It's not that fun to just follow a well established trend.
Unless you are in and it keeps going your way and you keep screaming it will go to zero like a crazy person. Now that is alot of fun (:
Phase 3: The end/Wave 5/Distribution/Ending Euphoric/Vertical/Exhaustion/Divergence/Ending Diagonal/Etc 1000 names
I like wikipedia description on that one:
"Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish.
Unfortunately (?), this is when many average investors finally buy in, right before the top.
At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received)." I doubt anyone knows or recalls for the older ones how bears were treated back in 2000.
My teachers in high school said I had a contradictory spirit. Some after hgih school said I "thought I knew things". LOL 😆.
What they meant is other people are idiots and I am not.
Not my fault the herd is always wrong. I am not going to pretend to be stupid just to "fit in with the herd of sheep".
They're still struggling teaching high school kids and I'm chilling treating the market as my personal ATM.
And then you got the suckers that get excited at the top. The most non-subtle example is Bitcoin permabulls. Wow those guys.
They have been bagholding for 2-3 years now. They'll still be bagholding in 5 and I'll be counting my millions. We'll see who'll (still) be laughing.
Playing reversals is possible because it is rather obvious when the herd starts getting interested and gets crazy.
Being obvious does not mean there is a magical way to call the exact top, and it will often take several losses before getting it right.
Concerning magical top & bottom calling, well I will get into it further down this idea :)
And then there is the opposite. Note at the time there was no way to know as far as I am concerned where the bottom/top would be, which is why we make a list of tops/bottoms and play carefully. If someone knows where tops and bottoms will be then show me your trillions:
It does not always just end up vertical at the top...
Phase +1: ABC, the correction
Yikes. No thank you. There are 5861 types of correction (more or less). Often very choppy and disgusting.
This is bad. Don't trade corrections. Let day trader-gamblers lose money through commissions and get caught in massive moves against them when it breaks.
All together
You're taking risks for profit. This top & bottom calling thing, and expecting to catch the whole move, is truly delusional.
Even in his most famous trades George Soros did not catch everything.
Don't go too early, don't be difficult or you'll miss it. It's hard to balance it out.
I have to stop going too early (too late for reversal and too early for meat of the move)
Need to be careful with conditions before rushing in.
Got the perfect exit never have any issues.
There is no perfect way to filter out the trash, no perfect way to know what will be a good entry...
Get punished for doing the right thing, get rewarded for doing the dumb thing...
Those that do not know this and won't quit, will eventually learn
An entry system truly worthy of the greatest myfxbook robots 💩 and Bitcoin trading experts 🤤.
