Why Do People Buy At A Top?

[abattia]

Quote from tradingjournals:

If you understand why people buy at a top, could you share it?

Perhaps reformulating the question provides insight inductively into what’s happening?

“Why do people buy at a top?” --->

“Why does a top (bottom) form when a herd of [retail] traders ‘rushes’ [i.e. using market orders] to buy (sell) all at once?”

IMHO, after the ‘rush’ the liquidity providers have an interest that is opposite to that of the herd (i.e. the liquidity providers place the limit orders that the market orders execute against).

As the herd were buyers (sellers), the liquidity providers’ interest is for a fall (rise) in price.

So the liquidity providers will mark down (up) their remaining orders accordingly.

And after the “rush” is over and the market orders execution rate slows down, liquidity providers marking down (up) their orders becomes the dominant effect.

And a top (bottom) forms.

 

[Visaria]

Quote from xelite777:

There is an old saying in Wall Street : "Amateurs buy 52-week high breakouts - and breakouts in general - , the pros fade them".

Enough said for the time being ...

Never heard this "old saying" before. I think you just made it up!

 

[GoldenMember]

because they all missed the bottom

 

[Visaria]

The "top" is only known after the event, probably some time afterwards. Hence buying at the "top" or selling at the "bottom" only means something in the future, the unknown.

btw i just bought es. Was my purchase made at the top? I don't know right now, but will in the future!

 

[Visaria]

Want to know something? I find buying new highs and selling new lows (in some time frame) very comfortable to do. Almost natural tbh. I've been told to wait for a retracement, and that usually does occur (sometimes it doesn't, so beware), but that makes me FEEL very uncomfortable.

 

[zdreg]

they buy at the top because they can't meet the margin call on their short sale.

 

[pfranz]

Quote from tradingjournals:

If you understand why people buy at a top, could you share it?

Most trading systems have at least one rule which says "buy at the top" or "sell at the bottom" of a certain time period.
The Turtles did just this,with some money management. This rule alone has been very profitable in 1980-2000 years, on a futures portfolio.
Aberration did something different,but the principle was still "buy high,sell low"

 

[Hansel H]

Why are people buying today? We're obviously near a top.

 

[Visaria]

haha, yes, soooo obvious!

 

[pfranz]

Quote from Hansel H:

Why are people buying today? We're obviously near a top.

"Obviously" the market was at a top when this thread started.
But now we are higher. So, people who bought at the "top" have made money.
This should be a response to the thread starter.