Trading the stock market, the “buy low, sell high” strategy is one of the most well-known general rules. It’s so simplistic that it may as well be a joke. It’s much simpler to say than to accomplish. With the “buy low, sell high” strategy, investors aim to profit by buying securities or other assets at a low price and then selling them at a higher one.
Since market prices are affected by how people feel and think, it can be hard to use this technique. Consequently, traders rely on a wide variety of other indicators, such as moving averages, the economic cycle, and consumer mood, when making their buy and sell decisions. In the next paragraphs, you will learn how to implement this strategy.
What is the Buy Low Sell High Strategy?
Market timing is the backbone of the “Buy Low, Sell High” investment strategy. Gains can be maximized by buying securities at low prices and selling them at high ones. In order to maximize their gains, some investors often seek out opportunities to buy low and sell high. A day trader can buy shares of stock in the morning and then sell them in the afternoon for a profit if the stock price rises. The net result is positive earnings per share. Meanwhile, a buy-and-hold investor could purchase stocks and then sit on them for many years or even decades. If they are able to resell the securities at a higher price than they bought them, they will make a profit.
Because market prices are hard to predict, it can be hard to use the “buy low, sell high” trading strategy. If you waste time trying to predict when the best time to buy or sell will be, you may lose out. It’s advisable to either buy or sell at the earliest possible time.
When a price drops, how do you know whether there’s enough of a reduction to make it worthwhile to buy? How do you know whether the price is high enough to make a sale worthwhile?
Traders and investors use moving averages to gauge whether or not a market price is at a high or low point.
Buy Low Sell High Strategy Strategy
The whole premise of the “buy low, sell high” strategy is built on the ability to predict when markets will rise or fall. Generally speaking, you should buy securities when they are low and sell them when they are high. Understandably, you’re at a pivotal point in your quest to comprehend the strategy’s operation, and you’re wondering what the terms “high” and “low” imply here.
Moving averages are the go-to technical strategy for spotting lows and highs (MA). The price movements over time are reflected in a security’s moving average, which is calculated using past prices. They average out price fluctuations so you can get an accurate picture of the instrument’s trend over time. For example, one common technique for monitoring market price movements involves using both a 50-day and a 200-day moving average. The movement of the 50-day MA above the 200-day MA shows that the price is gaining upward momentum, which could lead to a price increase.
On the other hand, a bearish market signal is sent out when the 200-day MA crosses above the 50-day MA. This suggests that the market price may drop soon. There is no guarantee that you can equal or outperform the market’s performance by buying low and selling high. Too much time spent trying to time the market exactly can be a sure way to make errors.
Buy Signal
- Open a buy order when the 50-day moving average is above the 200-day moving average.
- Aim for a risk-to-reward ratio of 1:2 or above for the take profit target.
Sell Signal
- Open sell orders if the 50-day moving average falls below the 200-day moving average.
- Aim for a risk-to-reward ratio of 1:2 or above for the take profit target.
Buy Low Sell High Strategy Pros & Cons
Pros
- There is potential for higher rewards.
- It helps investors in outperforming the market if their portfolio meets predictions.
Cons
- Market timing is imprecise
- Biases might impact decision-making.
Conclusion
The buy-low, sell-high investing strategy involves making purchases of currency pairs at cheap prices and then selling them at higher ones (ideally, at the peak). While moving averages and other technical indicators can help investors pick when to buy and sell, they still need still undertake their own due diligence to assess whether or not a company’s earnings or an asset’s returns are going to increase.
Although this method is most often used in discussions about the stock market, it can be applied to practically any securities or asset type. Because market behavior can never be predicted with 100% accuracy, relying on buy low, sell high brings with it a number of potential risks. However, if done while also applying other tactics to mitigate risks, investors can expect to see a boost in their trading operations.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
