Overview of the Buy Low and Sell High Strategy
A Look at the Buy Low, Sell High Strategy. What does this strategy really mean? Moving Averages. Business Cycle and Precision. What are some of the difficulties?
What does this strategy really mean?
Although the statement itself may seem obvious, behind it is the tendency for the market to move more than necessary in dips and rises. The reason for this is herd psychology, which can drive the price of any share. An investor who can watch calmly can see where the herd is going. This can take advantage of extreme ups and downs. This investor can buy low and sell high.
Unfortunately it is easy to see that the price is too low or too high. But it should be noted that it is extremely difficult right now. Prices reflect both the psychology and the emotions of those who participate in the market.
For this reason, "buying when low and selling when high" is a very difficult strategy to implement consistently. Traders who want a more objective view also consider other factors to make more informed decisions. Among these factors, we can count moving averages, business cycle and consumer sentiment.
Moving averages are based entirely on past price movements. They show the general direction of a stock's price over time, stopping short-lived price jumps and being affected by this, they show price fluctuations over time.
Some traders follow different moving averages, one short and one long term, to hedge the bearish risk. One common method is to take 50-day or 200-day moving averages. If the 50-day moving average exceeds the 200-day one, a buy signal will occur. Otherwise, it sends a sell signal.
The purpose of the moving average is to assist the trader to make a buy or sell at the exact right time on the trend.
Business Cycle and Precision
The whole of market agents draw a stable pattern in the long run, going from fear to greed and then back to fear. It is the best time to buy when fear is at its highest, and when greed is at its highest to sell.
These extremes occur several times every decade and show remarkable similarities. The emotional cycle follows the business cycle. When the economy stagnates, fear prevails. This is the time to buy from low to low. When the economy starts to grow, prices rise to death. This is naturally the time to sell from high.
Long-term investors can follow the business cycle and consumer sentiment to use them as market timing tools.
Regularly published reports such as the Consumer Confidence Survey can provide more detailed insights into the business cycle.
There are also examples of very badly remembered extreme market conditions such as the internet bubble of the late 90s and the market crash of 2008.
Both of these terms then proved to be excellent opportunities for those who bought low and then sold high.
Back then, it seemed as if the trend was never ending. If we ask them, it was not possible for internet shares to fall in 1999. In addition, it was definitely not possible for the real estate sector to recover after 2008.
People who sell internet shares or buy real estate shares during these periods may have thought that they were punished because the trend continued to move in the other direction. Later they changed their minds of course.
A successful trader should ignore trends and stick to an objective method of deciding when to trade.