The New Market Wizards: Conversations with America's Top Traders

by Jack D. Schwager

I don’t like to buy retracements. If the market is going up and I think I should be long, I’d rather buy when the market is strong than wait for a retracement. Buying on a retracement is psychologically seductive because you feel you’re getting a bargain versus the price you saw a while ago. However, I feel that approach contains more than a drop of poison. If the market has retraced enough to make a significant difference to your purchase price, then the trade is not nearly as good as it once was. Although the trade may still work, there’s an enhanced chance that the trend is turning. Perhaps even more critical, a strategy of trying to buy on retracements will often result in your missing the trade entirely or being forced to buy at an even higher price. Buying on retracements is one of those ploys that gives psychological satisfaction rather than providing any benefits in terms of increased profits. As a general rule, avoid those things that give you comfort; it’s usually false comfort.