Buy Low Sell High Trading Strategy
The best investors know that trends are only one piece of an ever-changing puzzle. They know when to ignore trends and follow their own method when deciding to incorporate a buy low, sell high strategy.
buy low sell high trading strategy
The strategy behind buying low and selling high relys on trying to time the market. Buying low means trying to determine when stocks have hit bottom price and purchasing shares in the hope of them going up. Conversely, selling high relies on figuring out when the market has hit its peak. Once stocks have hit their maximum value, investors sell their shares and reap the rewards.
Investors who look to buy low and sell high look at several factors to determine if the price of a stock is within the right range. It can be challenging to implement this strategy consistently, so traders look for certain markers to make an informed decision.
On the other end, investors who want to maximize earnings look for indications that stock prices have gone up high enough. Once the value has gone high enough to constitute a sell signal, traders sell the stocks and pocket the difference.
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The performance difference between the three cheapest factors and the three most expensive factors in the US market, reported in Panel B of Table 3, was 7.2% a year over the period from January 1977 to August 2016. With a t-statistic of 3.62, the difference is highly economically and statistically significant.14 In international markets, the difference is far smaller and not significant, which is perhaps a consequence of currently stretched factor (and smart beta) strategy valuations in non-US markets. If these markets mean revert, the gap (and its significance) will presumably rise. Interestingly, even with the stretched valuations, buying the cheaper strategies and factors would have proved beneficial.
Investors who choose to invest in strategies with the better past (and often recent past) performance hurt themselves, especially when they do so without asking whether the strategy (or asset class or factor) delivered that past performance merely by becoming newly expensive and whether the strategy is trading at dangerous valuation levels. Some practitioners counsel against asking these questions. We find this advice disturbing.
In our analysis of the eight smart beta strategies, we observe that a combination of the three strategies with the most attractive (least expensive) valuations tends to generate a higher return relative to an equally weighted mix of all eight strategies. The higher return does not come with an improvement in the Sharpe ratio because of the loss in diversification relative to the well-diversified equally weighted mix. To further study the benefits of diversification, we simulate one more strategy:
The performance of this strategy is presented in Figure A1. We compare its return and risk to three other approaches: an equally weighted allocation, a contrarian approach combining the three worst-performing strategies/factors, and a combination of the three strategies/factors with the least-expensive valuations. For both smart beta strategies and factors, the tilted-diversification-toward least-expensive strategy results in lower performance when compared to the least-expensive, less-diversified strategy, but it does have a higher Sharpe ratio. More details on the performance of the strategies and their opposites are reported in Table A1.
While the goal of almost every investment is to sell your assets for more than you bought them for, buy low sell high refers specifically to a strategy used by active traders. Long-term investors or passive investors may employ different strategies such as dividend investing or indexing.
Investors who use the buy low, sell high strategy tend to pay close attention to pricing trends or technical indicators in order to time their trades. Tracking trends for individual securities, for particular stock market sectors, or the market as a whole can help investors understand what kind of momentum is driving prices.
Investors who give in to biases may find themselves following a herd mentality when it comes to making trades. If news of a pending interest rate hike spreads fear in the markets, investors may begin panic selling. This can, in turn, lead to lower prices. On the other hand, irrational exuberance for a specific stock or type of security can lead to higher prices, causing an unsustainable market bubble.
A buy low sell high approach can also help investors to beat the market if their portfolio performs better than expected. If an investor is skilled in timing their trades, consistently buying low and selling high, they have a better chance of beating the market than investors who buy and hold.
This strategy is most commonly used to discuss stock trading, but it can be utilized when investing in almost any security and asset class. Many collectibles investors utilize trends of consumer sentiment to time when they should purchase and sell rare collectibles, for example.
We develop a High Frequency (HF) trading strategy where the HF trader uses her superior speed to process information and to post limit sell and buy orders. By introducing a multi-factor mutually-exciting process we allow for feedback effects in market buy and sell orders and the shape of the limit order book (LOB). Our model accounts for arrival of market orders that influence activity, trigger one-sided and two-sided clustering of trades, and induce temporary changes in the shape of the LOB. We also model the impact that market orders have on the short-term drift of the midprice (short-term-alpha). We show that HF traders who do not include predictors of short-term-alpha in their strategies are driven out of the market because they are adversely selected by better informed traders and because they are not able to profit from directional strategies.
With the buy low, sell high strategy, investors try to do the opposite of the general public. When others are fearful, they buy at low prices. Then, when people start purchasing more stocks again, investors sell at higher prices.
Buy low, sell high is a simple concept to understand, but it can be challenging in practice. Even with thorough research conducted, public sentiment is hard to predict and pinpointing highs and lows is much easier in retrospect than ahead of time.
While this sounds like a very easy way to make money in the markets, it can be difficult to implement in real-life trading. The main problem for traders is to identify how low is low enough to buy, and how high is high enough to sell.
Conversely, traders who are trading during a downtrend try to catch the top of a price-correction in order to short-sell a financial instrument at a higher price, providing them with a higher profit potential if the market continues to move in a downtrend. During downtrends, the market forms lower lows and lower highs, with each consecutive lower low exceeding the previous low. Lower high, on the other hand, is a counter-trend move that goes in the opposite direction.
However, while this sounds like an easy trading strategy to make consistent profits in the market, many traders have difficulties to measure how low is low enough to buy, and how high is high enough to sell.
Traders should look to buy at dips during an uptrend (buy low) and sell at peaks during a downtrend (sell high.) Those MAs can also act as dynamic support and resistance levels at which the price tends to bounce off.
Buying low and selling high is a trend-following trading approach that aims to catch higher lows during uptrends and lower highs during downtrends. While the principles behind the strategy are quite simple, traders find it extremely hard to identify the perfect point to buy or sell in the market.
Finally, market sentiment indicators offer a longer-term view for trading the strategy that is more suitable for longer-term investors. When market sentiment and consumer confidence indicators decline, fear hits the market and prices fall well below their fair value, traders should look to buy.
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.
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.
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.
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.
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