The buy low sell high method is one of the most widely used strategies in trading whose practice consists of buying stocks or other assets when prices are low and then selling them when prices rise, some technical in nature and others related to investor psychology and sentiment..
Although the method is quite intuitive, in truth using this strategy is quite complicated, this is because the price trend of a stock, especially when evaluated in the short term, is very difficult to predict since it is affected by countless factors.
How traders use the strategy
Professional traders, before assessing whether the price of a stock is actually low, or high, use a number of tools such as moving averages, the trend of the business cycle, and the mood of consumers.
The key point of the strategy is that prices are mostly driven by the mass of consumers, who push the stock to be priced too high or too low based on what its real value is. The trader's goal, therefore, is to find these price anomalies and exploit them to his or her advantage.
Sentiment thus plays a crucial role, since, especially in complicated periods, a large portion of novice investors panic, deciding to sell their stocks and causing a price collapse.
When the price collapse comes for such reasons, in most cases prices will tend to rise again, which is why the professional trader will profit from the purchase that occurred during the price collapse.
Similarly, there are within the business cycle moments of great enthusiasm that prompt investors to buy stocks excessively. This is the right time to buy sell at a high price.
The key point of the buy low sell high strategy
In best understanding the buy low sell high strategy, it is necessary to dwell on the fact that successful investors do not follow the crowd, but observe it. In this way they are able to tell when the prices of a stock are moved up or down excessively, going against the trend.
A fairly recent example is the market crash that occurred in March 2020, where most investors, fearful of the situation, decided to sell their stocks, creating a drastic drop in prices.
At the same time, several professional investors decided to buy titles, knowing that in a more or less long period of time, they would rise again, as it actually happened.