This article follows the other piece written a while ago, titled, "Buy or Sell? That's the question". Have a read if you have not had that opportunity.
Buy low, sell high. That's how we make money, right? Or is it?
What about this? Buy high, sell higher? Possibly.
The mentality of wanting to buy at the price bottom is understandable and what we humans are like... A bargain! How many times have we waited for a change of season sales, a year end or Christmas sales to buy something we had wanted all along? Especially if there's a 50% off written all over the display windows. What about a 70% off? Why not make it 90% then or a "closing down" sale?!
It's the same thing as purchasing the stock of a company. When you spot a fire sale, will you scoop it up? Or will you be too scared to do so when the time comes? Two things could have happened when a company shares price kept dropping. 1) The market is in 🐻 state and market valuation is ever-dropping; 2) Something happened to the company; it might be a result announcement, and the market doesn't like it.
How do you know then when to buy? For a value investor, I would say when no one is interested.
Obviously, you have done your homework on its valuation in this case. For a momentum investor, I would say wait for the company's stock price to break its recent high, or even a 12 months high!
For both types of investors nevertheless, I would want to wait for the price to turn into an uptrend before making a move. Why? Buying in a downtrend is dangerous because there is no telling how low the price will go!
If someone tells you he or she can buy at the price bottom, he or she is either a fraud or plain lucky.
There's no one correct way to buy. We have to just minimise the risk before entering a trade. This could be done if buying is done in an uptrend. Do not look down on price action or technical analysis. Uptrend is an indication that the worst might be over, or people are starting to find value and bad news has been priced in. Uptrend will bring momentum and attract more people into the market to support the price movement. Similarly, you might want to see a gradual uptick in volume. That is further indication that more participants are entering the market for the same company or counter.
When the uptrend is confirmed, you could start by nibbling at first and average up thereafter. Yes, averaging UP, not DOWN. It's an indication that you are on the right track. If it's a dead 😺 bounce, the price will correct down. First, check if the uptrend is still intact. Cut loss when the trend has turned. No question asked! Do NOT buy MORE! If we are wrong in our entry, averaging down just amplified that mistake and increases the loss!
Following the above steps would give us the best possible upside when entering a new position while protecting us from downside.
We are not Warren Buffet. There's only so much cash we have. The last thing we want is to suffer from unrecoverable losses by stacking the chips up the wrong place.
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