Buying Low & Selling High, Is it Really That Simple?

Posted: March 7th, 2009 | Author: Mo2 | Filed under: Investing, Stocks | Tags: buy low sell high, Dollar Cost Averaging, Finance, Investing, investing strategy, stock market |

You hear it often, you buy low and sell high! That’s the golden rule in making money. The question is, why aren’t more people doing it?

What is Low?
This is probably the biggest problem that you will face with this strategy. You never know where the low is. There are analysts out there that predicted that the market had hit a bottom a few months ago. In fact, analysts predict a lot of things but at the end of the day they are just that, “predictions.”

You can never time the market unless you have a crystal ball or have found the Holy Grail in trading. There are some investors that can time the market well but even they make costly mistakes over time. Trying to find the bottom is probably a waste of time if you are trying to build a longer-term portfolio like the one I am always preaching about here. If you are a short-term trader that is trying to make money intraday, then that might be different, but that is far more risky.

What is High?
So let’s say you magically timed the bottom, and yes it happens by luck, and now you want to sell “high.” So now you face the dilemma of selling at the greatest profit point! I remember reading on a forum before about how a trader thought of the market as a fish and they would ignore the “head” and the “tail” of the fish. By this, they meant that the “head” was the “high” and the “tail” was the low. All you need is the “body” of the fish to be making decent amounts of money, you should never be going for extreme profits because chances are you will most likely be giving back significant parts of your profit just because you expected a higher price.

Finding Your Own High!
If you have the luxury of watching the markets even remotely, then this is where I would recommend using a trailing stop loss. This means that you have a stop loss in place that increases as the market increases, but you keep the stop loss at a set range away from the current market price. So this could mean that if a stock is trading at $35 and you want to keep a trailing stop loss $3 away from the market you would have the stop loss at $32. If the market moves to $40 you would move the trailing stop loss to $37 and if the market drops to $35, your stop loss would have taken you out of the trade at $37 unless under extreme circumstances, like a gap in the market. Read my stop loss article to get a better idea of stop losses.

Dollar-Cost-Averaging
A few days ago, I wrote about the Dollar Cost Averaging strategy. This is probably your best way to finding your bottom. By employing the dollar cost averaging strategy, you won’t have to worry about timing the market and you can concentrate on other things. Over time your cost will average out very nicely and even in a down market, as we are experiencing now, you will eventually come out on top when the market recovers. Read my article about the Dollar Cost Averaging strategy here.

Setting Goals & Exit Strategies
Before entering any trade or investment, you want to know where you are going to exit. Many people say and I would agree that the entry is neither very important nor is it the hard part. The hard and important part of a trade is where you exit. If you have an excellent exit strategy, even if you lose money on certain trades you will definitely be making money on the long run.

This applies to a buy low sell high strategy, if you were to use it. By knowing when you are going to exit the trade on a stock, you won’t have to worry about finding a high, you can do something else other than trading and simply put in an order to sell at a certain price which you would be happy with. Even if the market continues to go higher, you won’t have to worry about it since you were able to get what you wanted out of the market and that’s what matters at the end of the day. Always keep your goals realistic, otherwise you will be much too greedy to profit from the market.

Mo2 Thinks
Buying low and selling high is almost too obvious to be a strategy in itself. However, many people preach about how it should be done and some even say it’s the only way to make money in the markets. In reality and in practice, it doesn’t happen very often. You have to find what works for you and be realistic with your exits. After writing this article I have felt the need for an article about exit strategies, and I will be sure to write one in the near future.

Try different things to see what will work for you. Not everyone will use the same strategy and there really is no need to be using the same strategies. We all think different and have different personalities. Just keep working at it until you know what will work for you and that will be good enough. The important part of any strategy is that you stick to it long term and do your best to turn it into a better strategy. Be patient and the market will do the rest of the work for you! Good luck and thanks for reading!

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