One of my favorite trader,Paul Tudor Jones once said “I believe the best Money is at the market turns, Everyone says you get killed trying to pick tops and bottoms-Well for 12 years ,I have missed the meat (Trend)in the middle but, I have made lot of money at tops and bottoms”
Paul Tudor Jones is an aggressive player but also a well planned risk manager. My experience as Institutional trader didn’t have any difference compared to the quote above. In fact majority of our profits came from picking tops and bottoms and not playing around the trend as per conventional wisdom. My firm always plays very aggressive during the market turns because hefty amount of profits made by picking tops and bottoms due to probabilistic nature.
Critics are quick in pointing out that trading top and bottoms are risky due to high volatility, abnormal market conditions, Liquidity preference etc, all these are valid arguments logically but my practical experience suggested a different aspect. Yes tops and bottoms are risky only if you’re buying higher in euphoria or selling lower in Panic!
Relax! That doesn’t mean you should always try to pick tops and bottoms ignoring the trend .There is a time for everything as Livermore quotes “There is a time to go long. There is a time to go short, and there is a time to go fishing!”
Few issues in picking tops and bottoms are being right in time and understanding the market psychology behind such formation, Also the most important part is money management.
So here is an example of how I do it using Price action and Market psychology. Before that let me point out one thing-You cannot pick tops and bottoms using some mechanical systems that’s the reason why a lot of market players restrain. It Takes experience, Skill and Intuition to do it
By using simple Price action along with some intuition on a discretionary basis I was able to catch the top. During the time it’s also the European sovereign debt issues which gave some insights. Indicators gave real buy signal at this point, but I trusted my gut instincts and went short.