Finding your bottom
This is not about your anatomy!
Finding the bottom of an instrument (in the market) is not as easy as most might expect. The bottom is not a clearly defined point either. It’s often a band or range of price – as price varies around the so-called bottom.
There may be no one bottom. A bottom today is not the same as one two months from now. So, in effect one is looking for a ‘relative’ bottom. Bottoms are good, because if you spot them, they may be good places to assess whether to go long. They can also be dangerous places, if you don’t limit your loss with an appropriate stop-loss.
Two charts below show this bottoming out effect.
Bitcoin (BTC) on the monthly chart to the left has been almost flat for 3 months. I had spotted a potential move up the daily chart over several days – and decided to get involved with a 10p bet. The consistency and strength of the impulse coming from near the bottom. Having entered, I reached £150 in positive equity, then price fell back – which is not surprising. I’ve moved my stop-loss to a zero-loss position. So BITCOIN could do as it pleases now. Go north and I’m chuffed. Go south – I’ll be stopped out for no loss.
To show that finding the bottom is not easy at times, see Mallinkrodt below. Sometimes you pay to find it, at other times you lose finding it. I suffered £700 in losses on the way down because I didn’t know exactly where the bottom was going to be. Having found it I put in another £2 bet and recovered nearly half the losses. The rest of the trade is still running on £1 bet (of that £2 i.e. I ‘sold’ £1 of the bet) -and another trade that was already in progress went into negative £800 but has recovered well. I’m in positive equity and overall in a better position having found the bottom eventually.
I entered this trade because I had much confidence in Mallinkrodt based on a number of things – and I don’t go into all the issues. Notably there was no earnings release that might account for sudden fall in price of MNK. Strangely the DAX was heading north while MNK was going south. That was very uncharacteristic of MNK and suggested panic selling.
The next shot blow of MNK, show a band of support where price has bounced off. It’s easy in retrospect to say, “Well you could have waited for that.” But when you’re in it, you don’t know where price will stop. All you know is that it could bottom out anywhere. This is not the traditional snipe that’s been mentioned. And this strategy is not recommended for all.
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