Which is a better strategy?:
1. Buy High and Sell Higher (Trend Followers) OR
2. Buy Low and Sell High (Sounds Good)
Obviously, the 2 sounds good. It sounds logical. There is only one issue with (2): How do you know the Low is the lowest.
There is only one common sense when it comes to investing:
When stocks are in an uptrend, they keep moving higher. They do pullback to well-defined supports where dip buyers buy and the stock continues to inch higher. The trend investors Buy High and keep selling Higher.
When stocks are in a downtrend, they keep trending lower. It means no low is good enough for the stock. Hence, what sounds like Value Buy ends up becoming Value Trap
Illustration: Idea Stock Chart
I covered the Idea stock on June 3 2016 indicating that stock is in a severe downtrend and AVOID. The stock was at 105 then
What was suggested: Idea stock is avoid based on Science of Stock Price Action.
Another 5 months have passed and despite strong overall Bull market - Idea stock is right now trading at 77. It's down anther 26%. Here's how the stock looks right now
It's down 46% in CY 2016. Has the Value emerged? I don't know. I heard strong Value calls even at 105. The Point is simple: Price Action Followers should not try to swim against the tide oops trend 🙂
Science of Stock Price Action
If you find my work interesting - I will encourage you to buy the Science of Stock Price Action book and access all the Price Action concepts that drives stock prices. Science of Stock Price Action is a collection of training videos and daily posts in which we discuss various price action concepts. The objective is to help one learn and master the concepts. What makes the book different: It comes with recent case studies so that one can understand the concept better
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers