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Understanding the Buy Low, Sell High Strategy

August 17th, 2020

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One of the simplest strategies that you can use when investing in the stock market is to "buy low, sell high."

This strategy continues to work for many investors after having been successfully tested and used for many years.

If you are just getting started in the stock market, this method is an excellent one to start your stock investing.

This article will teach you everything you need to know about the buy low, sell high strategy, including teh techniques you need to implement this strategy in practice.

The Strategy Behind "Buy Low, Sell High"

In essence, the "buy low, sell high" strategy is based on trying to determine when prices are going to go higher than they are or lower. There is always a range of value that any stock will have and its value will change some every day.

Figuring out when it will be lower than usual – possibly even at its lowest point – is the best time to buy. When a stock reaches what is believed to be a higher point than usual is the best time to sell.

This is called timing the market. Although the principle sounds simple, it is more complex than what it may seem.

Other facts about a particular stock or sector also need to be considered before making your decision to buy or sell. If you do not understand some of the other factors, you are bound to lose more money than you want by trying to guess how stocks will perform.

Understanding How a Stock Is Performing

Before you ever try to determine the best time to buy or sell, you need to look at a stock's performance. This will let you see how it rose or lost value over a specified recent period. You need to be able to see a trend before you can know how well it has been performing.

Generally, investors will look at charts that show them how that stock has been performing recently – over the past 50 days. Then, they will look at a longer range chart to understand how it has performed over the past 200 days.

Looking at both charts enables you to see the stock’s recent moving average and also how it has been performing long-range. These two charts will help you know whether the stock fluctuates much and whether it is rising or dropping in value.

When you see its overall performance, this can help you know when it may reach a lower than usual point to buy, or a higher than usual point to sell. Remember that you only want to buy when you anticipate a stock is lower than usual and is unlikely to go much lower. By understanding its moving average highs over some time, it can help you predict when a stock has reached its greatest value and sell it to get the largest amount of gain.

Other Factors to Consider

You can anticipate when a stock will reach a desirable high or low by understanding some other important factors that will affect its value. The stock market reacts to events or economic changes that affect how people perceive what may influence a company or a particular type of stock.

There are many things that will affect the stock market. The more factors that you consider the better you will be able to predict when highs and lows may be expected. Among other factors, they generally include:

Economic News or Forecasts – When news is released about positive employment statistics or information about the passage of a new stimulus package you can expect an increase in many stock values overall. Announcements of trade wars or economic sanctions being put in place will cause prices on some imported goods to rise, which can also affect the stock markets.

Interest Rates – If the Federal Reserve announces an increase in interest rates, people look at this as a positive indication that the economy is good. When the opposite happens, people do not have as much confidence in the stock market and may look to sell. Small changes in the federal interest rate may not produce much of a change.

Supply and Demand – The quantity of an item that is available, whether it is a food, a product, or even shares, will affect the value of it. Shortages cause price increases, but an overabundance can cause prices to drop.

Inflation and Deflation – When prices are on the rise (inflation), it means you have less buying power. This usually results in companies holding on to their money. When prices decrease, even though it means more buying power, it also indicates that economic trouble may lie ahead.

Shocking News Events – Things like the threat of military conflicts, terrorist acts, chemical spills, airplane crashes, etc., will affect the market negatively. Prices can be expected to drop. Shakeups in large companies, politics, mergers, changes in oil prices, natural disasters, etc., will also cause a stock’s value to decline.

As an example, when people were told to stay at home during the pandemic, it immediately affected many stocks at the same time. Travel almost completely stopped, this means that it affected the airlines, cruise ships, trains, etc., and everything that is connected to it – oil prices, oil companies, employment, etc.

Soon afterward, it also affected electronics positively, because people needed to start working from home. They also bought more cellphones, widescreen TVs, computers, and more. Companies such as Amazon and other order online companies began to profit immensely, which greatly increased their value.

Bandwagon Effect – As news of more and more investors buying stock in a particular sector or company (such as Apple, Amazon, or Tesla), you can expect a large number of investors to follow suit. This can be a problem because it could easily cause the stock to become overvalued. When stock becomes overvalued, a market correction will eventually occur, causing it to quickly lose value.

Final Thoughts - Buying Low, Selling High

Changes in any of the above factors can cause the value of any stock to rise or fall very quickly. Before doing any buying or selling of stock, make sure you look over some of these factors and look at trends to reap the largest gains on your investments. When using this strategy to determine the best time to buy or sell, it depends on your investment in time to sufficiently research market information to enable you to find that perfect moment.

Another way around having to invest time in research is to let an investment company or specialized investment software handle your trades for you. Software from Passiv will enable your trade calculations to be performed automatically after you set the parameters. It also enables you to keep your portfolio balanced and aligned to meet your target goals and notifies you when dividends or new contributions arrive.

The software is easily integrated with brokerages in the U.S., including Alpaca, TD Ameritrade, Interactive Brokers, and more. The process is easy and you can have it set up in just a few minutes – relieving you of the need for research and making better investment decisions that lead to faster growth for your retirement.