buying the highs

[bone]

So if we currently look at AAPL it is consolidating at new highs. Using your statement, the market is okay with aapl being here and therefor on the break we should take a buy?(I bot the 190 call Jun8 for .79). When SPX took that dump 2 days ago AAPL barely budged aswell, I think this also shows strength. I wish I could understand why this "momentum" factor works for mega caps. Because ALL information should be baked in and therefor momentum should not exist. Any idea on how better I can understand why momentum works? Thanks Bone

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I wouldn't look at "momentum" the technical indicator.

Market Profile is a pretty deep dive, and like most indicators it is not used correctly.

Your suspicion about AAPL staying strongish while SPX shit the sheets revealing inherent market strength is dead on. If you're looking at strength, look at the lows. Are they shallow during periods of selling ? During periods of buying are the lows higher than previous established lows ?

 

[bone]

but far better than break out entries.

In higher vol market conditions with greater trading ranges, break out entries will kill it.

 

[tomorton]

So if we currently look at AAPL it is consolidating at new highs. Using your statement, the market is okay with aapl being here and therefor on the break we should take a buy?(I bot the 190 call Jun8 for .79). When SPX took that dump 2 days ago AAPL barely budged aswell, I think this also shows strength. I wish I could understand why this "momentum" factor works for mega caps. Because ALL information should be baked in and therefor momentum should not exist. Any idea on how better I can understand why momentum works? Thanks Bone

The exact and immediate correlation between information and price is a false premise. Adaptation to new information is not instantaneous and at no point subsequently can ever be assumed to be complete.

 

[_eug_]

The way I see it is that if price in a stock has been a range for a long time. A year or more and all of the sudden we have a break out to the top to new never before seen highs. Maybe even a gap out of the range, then there should be some sort of information that those in the power to move prices up know, why else would they drive the stock out of a range that's been in play for years? The market psychology has changed at that moment and what was high before is no longer high anymore. This to me seems like a better bet then to pick bottoms. The risk reward is just much better as there is no resistance up ahead and potentially it can trend for months to come. I maybe being fooled by the bull market that we have been having for the last few years but looking at some key stocks in both Canada and the USA, this would have been a great strategy. This is more of a longer term strategy then day trading though. Breakouts in day trading are pretty sketchy and come back lots of times.

I have not tried to trade this way yet and I am just starting to study this method.

Just as an example, pull up a monthly chart of Lululemon Athletica (LULU). There are plenty more like this, and obviously also break outs that fail.

 

[tomorton]

The way I see it is that if price in a stock has been a range for a long time. A year or more and all of the sudden we have a break out to the top to new never before seen highs. Maybe even a gap out of the range, then there should be some sort of information that those in the power to move prices up know, why else would they drive the stock out of a range that's been in play for years? The market psychology has changed at that moment and what was high before is no longer high anymore. This to me seems like a better bet then to pick bottoms. The risk reward is just much better as there is no resistance up ahead and potentially it can trend for months to come. I maybe being fooled by the bull market that we have been having for the last few years but looking at some key stocks in both Canada and the USA, this would have been a great strategy. This is more of a longer term strategy then day trading though. Breakouts in day trading are pretty sketchy and come back lots of times.

I have not tried to trade this way yet and I am just starting to study this method.

Just as an example, pull up a monthly chart of Lululemon Athletica (LULU). There are plenty more like this, and obviously also break outs that fail.

If price is in a trend, the most likely thing it will do next is continue that trend. It follows that buying an uptrend has a better probability of success than buying a downtrend.

If price makes a new ATH, there is no resistance over-head, so again, its more probably successful to buy when there is no resistance compared to buying when there is some resistance.

However, buying where there is no support or only weakly demonstrated support or a support level a huge distance below is likely to undermine the balance of probabilities between profit and loss.

 

[schweiz]

However, buying where there is no support or only weakly demonstrated support or a support level a huge distance below is likely to undermine the balance of probabilities between profit and loss.

If you buy bottoms and sell tops, it means that you have support and resistance. If not the bottom would not be a bottom and the top would not be a top.
Bottoms are formed where there is a lot of support, tops are formed where there is a lot of resistance. Support and resistance are at that place so big that the market reverses.

The only problem is that you should be able to catch them with high probability. So the problem is that theoretically buy bottoms and sell tops cannot be beaten (because that is mathematically the maximum move that can be caught), but practically it seems to be a huge issue for most traders.

 

[tomorton]

If you buy bottoms and sell tops, it means that you have support and resistance. If not the bottom would not be a bottom and the top would not be a top.
Bottoms are formed where there is a lot of support, tops are formed where there is a lot of resistance. Support and resistance are at that place so big that the market reverses.

The only problem is that you should be able to catch them with high probability. So the problem is that theoretically buy bottoms and sell tops cannot be beaten (because that is mathematically the maximum move that can be caught), but practically it seems to be a huge issue for most traders.

In real time, you can't tell what is a bottom in order to buy the bottom. As price has been falling to reach this new low, its a good assumption it has been in a downtrend, and when price is in a downtrend, the most likely outcome is a further downward movement.

Until price starts to rise, there is no bottom, you're simply buying at a new low without support. But when it does start to rise, you could buy immediately, in anticipation of a V-shaped bottom and reversal from down to up, there is certainly an established support just below. The problem is that V-shaped reversals from strong downtrends to strong uptrends are not common.

Most new traders look for reversals. Most new traders go broke and quit.

 

[schweiz]

In real time, you can't tell what is a bottom in order to buy the bottom. As price has been falling to reach this new low, its a good assumption it has been in a downtrend, and when price is in a downtrend, the most likely outcome is a further downward movement.

Until price starts to rise, there is no bottom, you're simply buying at a new low without support. But when it does start to rise, you could buy immediately, in anticipation of a V-shaped bottom and reversal from down to up, there is certainly an established support just below. The problem is that V-shaped reversals from strong downtrends to strong uptrends are not common.

Most new traders look for reversals. Most new traders go broke and quit.

Therefore it is important to have a system that can mesure the strenght of the trend. It will help you to skip the fake bottoms, or at least reduce the numbers significantly. I worked on that for many years. I could increase the probability a lot, and even in fake bottoms I could reduce the losses. I get signals before the prices really change direction. Not exactly tops and bottoms but very close. Less then 1-2 point away in ES futures.

Of course new traders have no chance in doing that. Even very experienced traders that I know don't understand how to do that.

 

[Arnie]

It's at the new high for a reason. The underlying reason, a reflection of value, is more important than the price. Yes, the price might be high, but the question for any asset is what are you getting for the price? Buying a new high with strong volume shows conviction, both on the part of the new buyers as well as those short who decide to fold rather than hold.

Some of my best longs have been buying a new high near the close and holding overnight-to a few days.

 

[_eug_]

There is also a psychological issue with trying to buy bottoms because if you decided that price was cheap and on sale when you attempted to nail the bottom, but instead of going up it now goes down a bit more... this naturally feels like it is an even better bargain then it was before. This obviously can easily lead to averaging down losing trades.