Top Picking and Bottom Fishing All About Timing

Growing up in Chicago had plenty of perks: a beautiful skyline and parks, plus great food, entertainment and sports. But for the harsh winters, it is my kinda town. After college I had the opportunity to work at the futures exchanges, Chicago Board of Trade and Chicago Mercantile Exchange.

My first experience on a trading floor was horrifying and exhilarating. In my eyes it was total chaos with people in crazy colored coats running amok, while brokers and traders shouted with flailing arms in different arenas. The spheres of trading activity, also known as pits, were in seemingly constant motion from open to close. After that first day I was hooked, and the next 20 years were filled with many incredible lessons.

Over the years one thing I learned about short-term or day traders is that they are a defiant bunch. When prices fell they endeavored to pick the bottom or lowest price of the move. And when prices rose they looked to sell the high or top of the rally.

Top and bottom picking require incredible timing. But before markets get exhausted either up or down there is a pattern in price action that tends to precede change in direction. When a market moves methodically the trend tends to extend. A methodical move is when the day ranges are near average length during a rally or decline. A 20-day ATR (Average True Range) is my preferred benchmark.

Often before a rally ends there is panic buying, which brings on an overbought signal. Conversely, an oversold signal frequently kicks in prior to the bottom of a trend.

If a day range is twice the norm during a rally, it is considered overbought. Thus, the odds for a reversal increase and top pickers emerge. On the other hand, when a day range spans two times the average during a decline a pace problem appears signaling an oversold situation. When this occurs, bottom fishers often surface.

Overbought and oversold situations are common just before extremes are made. Measuring the speed of a trend is an integral part in a trader’s tool box. There are many technical indicators meant to help traders top pick and bottom fish. Some of the more popular are RSIs, Stochastics and MACD.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.