Buy low, sell high sounds simple enough, but it can actually be quite difficult.
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.
What is the “Buy Low Sell High” Strategy?
“Buy Low, Sell High” is a common investment strategy all about timing the market. Investors hope to buy stocks when they’ve hit a low price, and sell them when prices peak to generate the highest returns.
How Do Investors Buy Low and Sell High?
Buying low and selling high is not a foolproof way to match or beat the market’s performance. It’s very easy to make mistakes and lose money when spending too much time worrying about timing the market perfectly.
Common strategies to safely use this strategy include:
Invest with the Business Cycle
Understanding stock market cycles and their correlation to the business cycle can help determine how to buy low and sell high.
The business cycle refers to the rise and fall of economic activity that an economy experiences over time. If the business cycle is in an expansion phase and the economy is growing, for example, then stock prices may be on the upswing as well. On the other hand, stocks may drop after economic growth reaches a peak.
Use Stock Pricing Trends
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.
Technical indicators and trend analysis, like all market analysis, is not a guarantee of future performance — they are only a way of recognizing trends.
Track Moving Averages
Moving averages are a commonly used indicator for technical analysis. A moving average represents the average price of an investment product over a set time period.
To find a simple moving average, for example, an investor would choose a time period to measure. Then they’d add up the stock’s closing price each day for that time period and divide it by the number of days.
The moving average formula can help compare stock pricing and determine points of resistance. In other words, they can tell investors where stock prices have topped out or bottomed out over time. This is useful for smoothing out occasional pricing blips that push stock prices up or down in the short term.
Comparing one moving average to another, such as the 50-day moving average to the 200-day moving average, can also help investors to spot sustainable up or down periods.
Watch Out for Investor Bias
Investor bias is a pattern of behavior that influences reactions to a changing market. For example, noise trading happens when an investor makes a trade without considering the state of the market or timing.
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.
Investors who can refrain from being influenced by the crowd might stand a better chance of making rational decisions about when to buy or when to sell to either maximize profits or minimize losses.
Why Do Investors Buy Low Sell High?
A buy low, sell high strategy has the potential to work well for investors, but the implementation can be tricky and doesn’t always work out. Investors too focused on timing the stock market can end up running into difficulties.
Bargain-Buying Opportunities
If investor sentiment is leading to fear and panic in the market, pushing prices down, that could open a door for buy low, sell high investors as they buy the dip.
Individuals who ignore market panic could purchase stocks and other securities at a discount, only to benefit later once the market rebounds and prices begin to rise again.
Potential for High Returns
An investor skilled at spotting trends and reading the market cycle could see sizable returns using this strategy. The wider the gap between the stock’s purchase and sale price, the higher the profit margin.
Try to Beat the Market
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.
That is why this method is often preferable for active traders who forgo a passive or indexing approach to investing.
Risks of Buy Low Sell High
As mentioned before, this strategy does not always result in higher returns and comes with some investment risks.
- Read more: What is Risk Tolerance? How is it Measured?
Timing the Market is Imperfect
There’s no fail-safe way to time the market and know which way stock prices will go at any given moment. Even the most sophisticated investors with in-depth knowledge of markets will not get it right 100% of the time.
While tracking stock pricing trends and moving averages can be useful, they don’t show the complete picture of what drives pricing changes. There are other variables that influence pricing trends that may not be apparent if you are only looking at certain technical indicators.
For that reason, it’s important for investors to also consider other factors such as consumer sentiment, interest rates, geopolitical events and company news that influence stock prices.
Because of this, most investors will not rely solely on a buy low, sell high strategy in their investment accounts.
Getting Left Out of the Market
Using this strategy, investors often don’t buy securities during bull markets, instead hoping to buy when prices are in decline. This practice, however, could lead to significant time out of the market entirely, even as prices continue to climb.
If the markets are in a long bull run — as they had been for almost a decade before 2020 — prices will continue rising. The longer you are out of the market, the harder it’ll be to get in it without risking the loss of a much higher initial investment.
Takeaways
Buy low sell high is an investment strategy where you buy stock when prices are low and sell when prices reach a high point (ideally, at the peak).
Investors can use moving averages and other technical indicators to help determine when to buy or sell, but additional research should be done to determine whether or not a company’s profits or asset’s returns are likely to rebound.
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.
It’s important to keep in mind that relying on buy low sell high can come with many risks because market behavior is impossible to perfectly predict. If done while mitigating risks by employing other strategies as well, however, it can see higher returns for investors.
This material is provided for informational and educational purposes only. It is not intended to be investment advice and should not be relied on to form the basis of an investment decision
