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Trading Lessons

Picking Tops & Bottoms Kills

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Written by Timothy Sykes
Updated 5/9/2022 5 min read

Hey Trader. Tim Here.

Shopify (NYSE: SHOP) traded at $1762.92 back in January.

So when shares dropped to $1,000, some folks probably thought it was a steal…

…down too much and poised for a bounce.

Today, it trades at $390.

If you’re still trying to figure out how to pick bottoms in this market…STOP!

Picking tops and bottoms is a fool’s game.

I turned $12K into $7M from trading stocks. I can tell you, none of those profits came from me trying to pick bottoms.

Instead, you want to wait for a top or bottom to form.

I see you’re skeptical

It might seem counterintuitive and totally at odds with my #1 Supernova pattern. 

But there’s a good reason.

Waiting for a top or bottom to form gives you something to trade against.

And this is CRITICAL to risk management.

Because I always say, lose small and fast.

So how can you do this without knowing where your stop and targets are?

Yes, you could just go with stiff percentages like 5%-10%.

But let me show you why you should wait for highs and lows to form.

Trading in the open

Back in March of 2020, markets were in absolute freefall.

How many traders and investors do you think tried to catch the bottom, only to watch stocks go even lower?

If you took a trade, could you tell me how wide your stop should be?

Flat percentages work fine when everything is normal. But what about when volatility increases? How do you adjust them?

Take a look at the chart of Shopify going back a year or so.

I highlighted four different areas where shares took a brief pause before they continued lower.

Let’s zoom in on the second one that sits right below $1,000.

You’ll notice there are two labels A and B.

Imagine you tried to buy somewhere in that first long, red candle next to A.

You might get the bottom. More likely, you’d get somewhere between the high and the low.

But while you’re in that trade, you’d have no idea how much lower price could drop.

What if instead, you waited for that first green bounce candle and then bought a retracement of that candle using the low as a stop?

That sounds a whole lot easier than hoping you got the bottom.

You see, there’s a lot more risk involved when you don’t know where the low or bottom is.

When you wait for a bounce, you can at least define your risk.

Plus, you also know that based on the chart, buyers overwhelmed sellers at least for a short while.

Let’s go back to a chart from one of my trades earlier last week, Sysorex (OTC: SYSX) so I can show you how this might apply in a real trade.

If you recall, I waited for the panic dip to occur before I bought into the stock.

That gave me two potential stops to use: the panic low or the low of the upper trading range.

In this particular trade, I didn’t see the bounce immediately so I cut the position for a slight gain.

Now, I mentioned that I should have probably waited for the stock to drop into the $0.04s area.

Thing is, that’s a big range.

So, how might I have found an entry point?

Take a look at the area below I highlighted.

What you’ll notice is that shares rang into a support line I previously identified on heavy volume and simply stopped.

That’s about as clear a signal as you can get that the stock has found a temporary low.

It could be the permanent low, but we don’t know for sure. However, since there was heavy volume and it was a previous support level, that increases the odds it becomes a low.

Knowing that, we can structure a trade using the low of that trading range as our stop.

For example, I could wait until the stock breaks higher out of the range and then buy it on a pullback, or simply buy the stock against the low.

The former tends to be easier to work with as price can spike the low a few times just to stop out longs.

Start with this pattern

My Supernova pattern is a great place to apply this concept.

It’s my #1 pattern and the same one I used to help make my first $1 million trading.

Click here to learn more.

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”