Picking tops or bottoms is generally quite difficult as one often does not have clear technical divergences that can give them enough conviction and discipline to take a position. Oftentimes traders will convince themselves that a market can?t go any higher or lower and keep fighting the trend as they are repeatedly stopped out.
Successful trading or investing is dependent on trying to put the odds in your favor and then having a clear exit strategy for when you are wrong. The S&P 500 had several wide swings in 2012, which made it a difficult year for many traders and investors. Buy and hold was only possible for those who were totally oblivious to current events.
Despite the powerful performance of the stock market in 2013 there were several classic corrections that allowed both traders and investors to buy. Clearly, 2014 has been even a more difficult year. To successfully trade retracements, you need to have patience and there are several technical tools that can help you identify in advance potential buying or selling zones.
Typically, when a retracement is ending, it will be a difficult time for the investor or trader as the market momentum and the sentiment is at a level that causes many to question their analysis making it more difficult to act.
I realized early in my career that most retracements take longer than one expects as one must consider how long the prior rally or decline has lasted. For example, if a rally last three or four months then a three-four week correction would not be surprising. On the other hand, if the breakout rally last just three weeks, a five- or six-day correction is often enough.
Source: Markets
