Across many different industries, the idea of “buy low, sell high” is well-liked. An example of buy low sell high trading strategy in action is when people purchase inexpensive homes, renovate them, and then sell them for more money.
The same goes for those who buy antiques at garage sales for a few dollars and then sell them online for hundreds or even thousands of dollars.
The purchase and sale of stocks are the main focus of this article. Read on to learn more about the buy low, sell high strategy, including how it works, the pros, the cons, and more.
- A buy low, sell high trading strategy involves purchasing stocks or other securities at a low price and then selling them at a higher price.
- Investors buy low and sell high to maximise profits
- Other strategies used by traders to determine when to buy and sell include moving averages
What is the buy low sell high trading strategy?
The buy low, sell high trading strategy encourages buying stocks or other securities at a lower cost than you may subsequently resell them for. The buy high, sell low strategy (which essentially encourages investors to sell their stocks at a loss) is the opposite of this.
Investors that buy low and sell high may be doing so to increase their profits. If the stock price rises, a day trader might buy shares of stock in the morning and sell them at a higher price per share in the afternoon. The final outcome is a profit per share.
A buy-and-hold investor, meanwhile, might buy stocks and hold them for many years or even decades. They will profit if they sell those securities for more money than they initially paid.
The buy low, sell high trading strategy can be complex as you can never predict when a stock price will reach its high or low. You’ll likely miss your opportunity if you try to figure out the latest point to buy or sell. Finding the earliest point at which you can buy or sell is preferable.
How do you determine when a price drop is significant enough to warrant a buy? How can you determine when prices have climbed high enough to justify selling?
Moving averages are used by investors to determine whether a stock price is high or low.
How does it work?
The buy low trading strategy is based entirely on market timing. Stocks are bought when their prices are at their lowest and are sold when they reach their highest levels. You might achieve the highest profits in this manner.
When a stock’s price is really low, you buy it. You sell that stock when the price falls, and you make a return on your investment.
The dynamics of stock market cycles are the foundation of the buy low, sell high trading strategy, meaning it’s designed to enable you to profit from the stock market prices’ volatility.
There are many reasons why stock market prices fluctuate, such as:
- Global events
- Overall economic stability
- Corporate changes
A company’s stock price may change due to these events.
The buy low, sell high strategy is effective when used correctly and goes against what most people would do. When investors are scared, they buy low. Investors then sell their stocks at a higher price when others start buying more stocks.
Buy low, sell high strategy – Pros and Cons
Buy low Sell high – Pros
- There’s potential to generate high returns. Using a buy low, sell high strategy an investor adept at recognizing trends and understanding the market cycle could make substantial gains. The profit margin increases when the difference between a stock’s purchase price and sale price widens.
- Buying opportunities at a discount. Investors who buy low and sell high may benefit if investor sentiment creates fear and panic to control the market and drive stock prices down. If you choose to ignore the market panic, you may be able to buy stocks and other securities for a discount – only to profit later when the market recovers and prices start to increase once more.
- • Beat the market. If their portfolio performs better than projected, an investor may be able to beat the market by using a buy low, sell high strategy. This may benefit active traders who decide against a passive approach to investing.
Buy low Sell high – Cons
- Market timing is not precise. There is no foolproof technique to predict the market or the direction that stock prices will go at any particular time. Therefore, if stocks haven’t hit their lowest or maximum values, investors who act prematurely while buying or selling stocks run the risk of losing money.
- The full picture is not revealed by pricing. Even though moving averages and trends in stock prices might be helpful, they don’t provide a clear image of what influences price fluctuations. Because of this, investors must consider additional variables affecting stock values, such as consumer sentiment, the likelihood of a merger, or geopolitical developments.
- Decision-making can be influenced by biases. If an investor allows it, investment biases and herd mentality can cause chaos in a portfolio. Instead of buying low and selling at a profit later, investors may find themselves in a spiral of buying high and selling low, resulting in money lost on their investments.
Buy low Sell high – trading strategy example
Two moving averages are frequently used by investors:
- 50-Day Moving Average: Tracks a stock’s recent 50 days of short-term performance
- 200-Day Moving Average: Tracks a stock’s long-term performance over the preceding 200 days
Let’s look at an example of moving averages with the buy low, sell high strategy.
- Buy shares: When the 50-day average surpasses the 200-day average
- Sell shares: If the 50-day average is lower than the 200-day average
An indication that the stock price is sharply growing is when the 50-day average exceeds the 200-day average. Stocks you buy right now are likely going to increase in value.
Looking at the averages for a fictional company as of one day in a month, we can see that:
- 50-Day Moving Average: 174.84
- 200-Day Moving Average: 142.33
As you can see, the 50-day moving average has risen above the 200-day moving average, which indicates that stocks are more inclined to increase in value if you buy now.
Read Also: Top Secret on How to Trade Boom and Crash
Although buying high and selling low is a smart strategy on paper, doing it in person can be challenging. Successfully implementing a buy low, sell high strategy requires research and due diligence to fully grasp how the market behaves.
Frequently Asked Questions
While it seems straightforward, this may not be the best strategy for many investors. To succeed, you must have a solid understanding of market trends, the financial resources to buy stocks and hold them until they start performing well enough to sell, and the judgment to recognise when to sell without greed.
There are too many variables to consider for a straightforward solution that works in every circumstance. Your financial circumstances will determine the optimal line of action, how soon you need to make a profit, and other factors.
The buy low, sell high trading strategy is legal. However, don’t act on confidential stock-related information you learned through private sources, as you may face legal issues. Insider trading is illegal, which is what this entails.