You often here the cliché “buy low, sell high” but this is seriously misunderstood statement. Buy low is relative and DOES NOT MEAN try to pick the bottom of a move or a turning point of a commodity, index or stock. It does not mean buy THE low. In many ways it’s a silly statement for traders to ever use, because as most experienced traders will tell you, the amount of time you will buy the absolute low can be counted on one hand with plenty of fingers left over.
The correct statement would look more like “buy high, sell higher”. You will end up with a higher win ratio if you buy a market that is already heading up rather than buying a market that is going down hoping you’ve picked the turning point. A market that is plunging tends to continue lower. It’s similar to hopping into an air balloon as it begins to rise. You don’t go for an air balloon ride by jumping into one that is plunging to the ground. There are times, however that you can improve your entry price buy entering a long in a falling market and we call those times “rotations.”
A rotation is a pullback in a market that has already broken out in one direction or the other. They key to these trades is finding a breakout that has significant support or resistance to pull back into. The image in this article is a one hour gold chart (GLD ETF). You can see a very emotional break-out through a downward sloping trendline. Most traders would look at this chart and think they should have bought at the lower trendline near the blue arrow, but this by itself is not the high-probability trade. The high-probability trade is a buy after the breakout of the trendline and above the red resistance line, shown with a red arrow. This chart gives you an opportunity to wait for a pullback to the resistance line (now turned to support) which also come in at the same level as 2 key moving averages. The orange arrow represents the rotation-buying opportunity and you can see the return to upward momentum highlighted by the green arrow.
When a trader tries to buy lows and sell highs to maximize profits, they are making a very common mistake. Profits come by taking high probability trades, not by taking poorly planned trades with high profit potential. Take a ride in the balloon going up. Buy high, and then sell higher.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results