Useful! Useful! Useful!
Many traders like to predict tops and bottoms, aiming to capture an entire wave, only to chase highs and get caught in long-term losses. This trading method makes technical analysis experts shake their heads. So how should ordinary investors trade?
The author of this article, Welles J. Wilder, is regarded as 'the greatest technical analysis master of the last century.' In the field of technical trading, he is considered a 'pioneer,' known for many innovative and original concepts. He invented the famous Relative Strength Index (RSI), ATR, ADX, Parabolic SAR, MOM, ADI, and others in 1978, some of which are still very popular technical indicators among investors today. However, later on, the author abandoned the technical analysis indicators he developed, stating, 'There is no technical indicator that can accurately predict stock price direction,' and introduced the 'Adam Theory' as a replacement.
The tops and bottoms of trends are the nemesis of technical analysis traders. Why do I say this? Because all traders want to confirm tops and bottoms, but those who suffer huge losses trying to predict tops and bottoms outnumber those who suffer losses for other reasons combined. Attempting to confirm tops and bottoms actually contradicts the 'Adam Theory.' Predicting tops and bottoms is unreasonable; it assumes the market should behave in a certain way, which is completely opposite to trend-following.
Those who want to predict tops and bottoms are like saying, 'I know better than the market, I know better than other investors, I am smarter than anyone.' Such people are too arrogant. They might make profits for a while, but if they continue down this path, they will suffer significant losses. Ultimately, those who make money are the ones who remain humble in the face of market trends.
To put it bluntly, stop trying to predict tops and bottoms; in trading, you should treat trends as if they will never end! Does that scare you? Let me put it another way: let the market prove that it has reached a top or bottom. The Adam Theory can never accurately predict tops and bottoms, but when a top or bottom does occur, the Adam Theory will let you know that you should quickly exit your positions.
I know some traders who occasionally get it right and are addicted to predicting tops and bottoms, as if they are hooked. Even if it could be fatal, they still want to predict tops and bottoms. So please honestly ask yourself: 'Can I just trade without predicting tops and bottoms?' If the answer is no, do yourself a favor and put this book down and give up trading immediately. Unless you have too much money, you cannot afford this habit.
Good investors make good use of trends and durations, rather than turning points.
Remember, the Adam Theory can never predict tops and bottoms, but it is very useful between the two.
Let's talk about tops and bottoms (this applies to bullish situations and the reverse applies to bearish situations).
Traders' profits are mostly made between points C and E.
In fact, all our profits are made between points C and E. Why is that?
First of all, we certainly do not want to buy at point A. Since the market is still in a downtrend, why would we want to go long at this moment?
Let's imagine again the metaphor of the homeless man and the train. The homeless man wants to catch the train going west. If he gets on a train heading east, he will have to wait for the train to slow down, stop, turn around, and then accelerate westward. That's ridiculous; wouldn't it be better to just get on the train heading west in the first place?
No sane homeless person would do this, yet I have seen many traders go long at point A. I have done this many times myself, and I paid the price. I did this because I previously heard people say to buy at lows, but that’s just nonsense; I did this because some analysts told me the market was about to rebound; I did this because I thought the market had 'hit the bottom' or 'was at a low point.'
If it can be confirmed that the bottom (point B) is not far away (don’t be foolish), buying at this time is not too bad, but actually, many times, point B is still very far away. How many times have I started to go long when the price was still falling, and then prayed for a rebound?
Buying at point B is not necessarily a good idea, because we cannot confirm that point B is the bottom until the market rises to point C. Point B could be the bottom, but the market could still continue to fall for a long time. I know this because I've seen this happen too many times.
Even if point B really is the bottom, buying at this moment is still not a good trade because only when the market rises to point C can we truly prove that point B is the bottom. Therefore, buying at point B is akin to predicting market movements, which is not a wise approach.
(That's right, sometimes the market trend can be predicted, but that is still unwise because trend-following is much more effective. Moreover, just trying to predict the market's direction is already a wrong mindset.)
Trend-following means buying during a bullish trend and selling during a bearish trend.
Therefore, the appropriate action is to buy at point C, when the market has completely reversed and is accelerating in the direction we desire (Why do we wait until the train is heading west before we jump on? Because the only way to confirm that the market trend is upward is that it is already rising).
So, absolutely do not try to predict tops and bottoms. Let the tops and bottoms reveal themselves. We can remind ourselves with one sentence: Those who try to predict tops and bottoms will ultimately end up empty-handed.
My colleague William once said to me, 'What right do I have to confirm tops and bottoms? I'm not that smart; why should I do this?'
These are the words of a very powerful investor.
Bernard Baruch, who made $30 million in the market (at that time, about ten times more than in 1987), said:
Except for fraudsters, I don’t believe anyone has the ability to confirm tops and bottoms. I only operate within the 50% range of the main upward trend. That's enough.
In other words: absolutely do not look for reversal opportunities.
Follow the direction of the market and do not look for reversal opportunities.
The trend is your friend.
There was a very successful investor who thoroughly studied the market with a computer. He said:
"I input a large number of figures into the computer, these are trades that have made a lot of money in the past. I tried to clarify some trading methods I had heard about and tested them on the computer. I found that among the profit methods others claimed were very useful, there were very few... Well, if you ask me how to operate effectively, the conclusion I drew from those numbers is: the trend is your friend."
The implicit meaning is that the only important information is price. When observing the market, all other information is unimportant because all information has already been reflected in the price.
If that homeless man wants to catch a train going west, he just needs to look at the direction of the train's movement and whether it is going fast enough. He doesn't need to know how the train was made, how many people are on it, or what its power source is; that information is not important. He just needs to see the direction the train is moving.
For the important and unimportant things in the market, that computer analyst summarized his thoughts in one sentence: 'The current situation is already reflected in the price.'
To make a profit, you must follow the direction of the trend from entry to exit; there is no other way.
If you do not understand technicals, do not pay attention to news, and do not analyze, just focus on learning and practicing well.
