Oversold levels and Reversals

I wrote yesterday that when all is dark look for the light. Yes, the markets look oversold. But that does not mean we will immediately have a reversal. We may but we also may not. My point is it is still too early to get in anticipating a reversal from here. I would rather wait for the market to show me that it is reversing before I jump in.

It is hard to wait and stay disciplined. But we have to let the market come to us to increase our chances of success. Can the market reverse immediately from these oversold levels? Yes, it can. But, if we look at history, the market can stay oversold for a long time without reversing.

If we wait for the trend reversal and then make our trade, we will most likely still make 50-80% of the move. We do not need to attempt to make 100% of the move. That is too much perfection to strive for. And there is a good chance to get punished for that attempt.

Our job is to make money, not to be right. This is not a tennis game where you keep trying the difficult shot in the hope that you make it in the end. Here, whenever we take a shot and don’t make it, we lose money. So, we have to be selective of what shots we make.