Page 370 - THE MARKET WHISPERER

366 PART 10 - Winning Trades

How to Identify a Bottom

Crises are an inseparable part of stock exchange life. Once every few years,
the stock exchange crashes due to one crisis or another. Statistically, the
average investor experiences at least three major crashes during his or
her lifetime. During the past decade alone, markets crashed due to two
mega-crises: the Internet Bubble of 2000, and the Financial Crisis of 2008.
Second-level shakeups appear as mini-crises, such as with the collapse of
the Twin Towers on 9/11, or the Dubai crisis, the Greek crisis, the Japanese
tsunami, and other events which I have already forgotten.

At the peak of the market’s reaction to the March 2009 Sub-Prime
Crisis, very few people actually identified the bottom. Nor could they have
even imagined in their wildest dreams that in just over a year, the market
would lurch from the bottom with a meteoric rise of 100%, with hardly a
backward glance. Buyer opportunities at the bottom are extremely rare,
but allow us, if we identity the bottom correctly, to utilize trading methods
for longer than the short term to which this book relates. I believe that as
traders, we must be open to all types of opportunity, even if it sometimes
deviates from the limitations of our short–term approach. We must operate
as day traders, yet hold stocks for periods of several days to several weeks
using swing methods, and in special instances, try to profit from longer-
term volatility of several months.

Since 90% of the public loses in the stock market, we need to conclude
that the public tends to buy stocks when they are at peak, and dumps them
when they reach “rock bottom.” What can we conclude? That we need to
do exactly the opposite to what the general public is doing. The way to do
that is to identify the peak or bottom, neither of which are simple tasks.
I will try to provide you with several rules for identifying a bottom. They
are not perfect mathematical rules, but they will help you consolidate your
views when you next encounter a crisis.

These rules are very simple, but somewhat difficult to master. The
greatest difficulty is psychological. Our brains tell us it is time to act, but
our hearts resist. This resistance may derive from fear of loss, from social
pressure, from being spooked by the unknown, and more. Resistance
derives from the simple fact that we are human. Although the physical