Weekly Option Trader

We’re not talking Bikinis, we mean highs and lows.  Not as in buy low-sell high, but as in trends and chart patterns.

A stock industry maxim reads, “The public is right in the middle, but wrong on the ends.”  Spelled out, many fortunes will be lost by buying when one should ultimately be selling, or by selling when one should buy.

Many analysts try to predict tops and bottoms with price targets.  Their predictions may pan out with amazing accuracy.  Some well-followed analysts’ predictions become self-fulfilling prophecies.

Have you ever bought a stock at the bottom?  Or better still, sold at the top?  How did you know at the time it was one of the extremes?  Luck or genius?  If someone bought at the bottom, then someone sold to them.  For every seller at the top, there was an unlucky buyer.  Have you ever been on the wrong side of a transaction at either end?  Misfortune or ignorance?

Buying near the bottom is easier than selling at the top.  An absolute bottom exists, zero.  The ultimate top is unknown.  Theoretically a stock could trade to infinity.  Although I’ve never seen infinity on a chart.

Honestly, you could sell at the top.  As an example; selling into a merger or takeover.  When a company tries to take over another company, they have to pay above the then current market price to motivate shareholders to approve the sale.  If they don’t offer enough, they don’t get the votes.  Typically, a buy out offer will be the highest price in a specific time period.  Creating a top.

Some people trade blindly, others with blinders on, still others just need a different pair of glasses.  If you look at things in a different light, you should become better traders.

An old adage claims, “He who defines the terms, wins the argument.”  So don’t send me an e-mail disagreeing.  Some of this will be completely new.

No one can buy bottoms or sell tops.  Transactions require two parties, buyers and sellers.  There has to be someone on the other side of a trade.  Without a willing seller, a buyer keeps his money.  Without a buyer, no sale takes place.  Tops and bottoms have only one willing party.

Commonly known as the bottom, it should truly be known as the lowest price.  The highest price is not the top, but just the highest price.  Bottoms are lows that don’t go lower.  Tops are highs that don’t trade higher.  They can only be confirmed after the fact.  Not during or before, but after.

Prices decline because of concentrated selling with scattered buying.  Translated, more sellers than buyers.  Prices fall with lower sellers; a rush to the exit.  To fall further it needs a seller at a lower price.  If a seller at a lower price doesn’t exist, the decline will stop.  Even with ready and willing buyers, no transaction will take place without sellers. The absence of sellers indicates the bottom, a theoretical point just after the lowest price.

Until prices increase a bottom hasn’t been made, only a new low.  The price may stay flat, forming a solid bottom to rise from.  Only after the prices rise can one look back and see the bottom.  It must turn back upward.

Trying to buy a bottom is like “trying to catch a falling knife”.  More often than not, you’ll injure yourself.  Often a stock that you thought was trading near a bottom will fall even further.  Stocks bottom out when there is no one left to sell any lower.  You will be a better trader if you let the stock turn to the upside before buying.  Don’t get greedy.

The opposite extreme to the bottom is the top.  If prices decline because of selling pressure, then prices rise due to buying pressure.  Concentrated buying with scattered selling, more buyers than sellers.  A high is only a high until replaced with a new higher high.  A high becomes a top after it peaks and turns down.  A top is the absence of buyers.  No one to pay more.  Without buyers, sellers can not trade.

You may trade at the ultimate extremes in price, but you can not trade at the tops or bottoms.  There’s no one to take the opposite side.  If you traded at the extremes it’s not because of genius or stupidity, it’s because of luck.  Good or bad.  The good news is, you can create luck with knowledge and technical analysis.