Long-Term Investments
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Understand the merits associated with the “buy low, sell high” adage and determine whether or not it is actually easy to implement this buy and sell strategy.
Unless you’ve been living under a rock, the chances of you having heard about the “buy low, sell high” adage is high. This phrase is linked to the stock market and owing to the frequency with which it crops up, you might be fooled into thinking it is obvious. The harsh reality however is that it is far easier to discuss than to implement.
Defining Buy Low, Sell High
The truth behind this truism relates to the tendency of the markets to overshoot in both scenarios, the downside as well as the upside. This is owed in part to the pure herd instinct that propels stock prices forward. An investor who takes an objective unbiased look at the markets may be able to spot this herd instinct at work. S/he may then choose to take advantage of the extreme ups and downs that are consequently caused. This investor can therefore buy low and sell high.
The ground reality however is that it only becomes easy to spot instances of a price being too low or too high and the reason behind it only after the price changes. In the heat of the moment, however, this is a monumental task. Prices are affected by and reflective of the emotions and psychology of all those that participate in the market.
Owing to this very fact it can be hard to implement a “buy low, sell high” strategy consistently. In order to make a more informed decision, traders often take into account additional factors. These range from the business cycle and consumer sentiment to moving averages.
Understanding Business Cycle and Consumer Sentiment
When looking at longer time frames, the drivers of the market as a whole stick to a more consistent pattern wherein the market oscillates between fear and greed. Instances wherein fear is at an all-time high serve as the most opportune moments to buy stocks. On the other hand, when greed is at its peak, it’s the best time to sell.
Extreme scenarios occur a couple of times every ten years and they have a number of similarities. An emotional cycle is followed by a business cycle. When an economy experiences a recession, there is a lot of fear. This serves as the ideal time to buy low. In contrast, when the economy is booming, prices soar like never before. This marks the ideal time to sell.
Seasoned investors can consider keeping tabs on the business cycle along with consumer sentiment surveys as they serve as good tools to time the market. Additionally, reports that are published with regularity can provide further insights into business cycles.
Moving Averages
These averages are determined from price history alone. With them, it is possible to assess price fluctuations over time. These averages iron out any short-lived price wrinkles to show the overarching direction of a stock over time.
It isn’t unusual for traders to track two moving averages, one highlighting a short duration while the other a longer time frame, in order to shield themselves from downside risk. This is often done with a 50-day as well as a 200-day moving average. Once the 50-day moving average surpasses the 200-day moving average, a buy signal is activated. In case the 200-day moving average crosses the 50-day moving average, a sell signal is activated.
The value of a moving average lies in the fact that it helps traders time their trades and buy or sell at the appropriate time of a trend.
Additional Hurdles to the Buy Sell Trade
Market extremes serve as prime opportunities for those wishing to buy low and sell high. Examples of these extremes include the 2008 market crash as well as the internet bubble of the latter years of the 1990s. In each of these scenarios, there were instances wherein it felt as though the trend wouldn’t ever subside. That said, in both instances, the trends did ultimately change directions.
Final Thoughts
In the words of a renowned investor “It is a gross oversimplification to say that the key to investing is to buy low and sell high.” This quote is particularly true for those hoping to be successful investors. You must learn to overlook the trends and instead should focus on an objective method of discerning whether it’s an appropriate time for you to buy or sell. Learn more about trading, investing and the markets on the Angel One website today such that you aren’t ever caught unawares.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.
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