Namaste to all #traders and #investors. 🙏
“Buy low, sell high” is probably the most famous strategy for making money in the stock market. It does not matter whether you are a long-term investor or a short-term trader. This strategy works for almost everyone. If used correctly!
Image by storyset on Freepik | Edited on Canva
But most beginners are always searching for some top-secret strategies to make consistent money. Which unfortunately no strategy can do. Because,
Making money consistently requires the right mindset more than any strategy.
First of all let us know why I chose such a title for this blog.
As the name of this #strategy implies, buy at a low price and sell at a high price. To know when a stock is cheap or expensive, you can take the help of fundamental analysis as well as technical levels based on historical data.
Now just hearing this, all the newbie traders start buying at every support and selling at every resistance, In the hope that the price will surely reverse from here. Which leads to unexpected loss not only of money but also of confidence.
Here I will give you the right interpretation of this strategy which I have understood and experienced in my own trading journey.
First answer one question.
A stock closed at Rs 100 yesterday, would you consider it cheaper today and buy at Rs 96 or Rs 105?
[Take 1 minute and think about it and then write your answer in the comment section.]
Probably anyone reading the question will say that only Rs 96 will be considered cheap. Because the price had sustained at Rs 100 a day ago, which is correct.
But now I want you to answer by looking at the price action in the image shown below.
Now people having some knowledge of technical analysis may say that since the price is showing an upward trend and it has not come from 96 to 105 but from 112 to 105 after which now 105 can be seen as another higher low, meaning from here it will surely go up.
If you thought something similar to what I have said so far then you are on the right track but before placing a buy order it is also important to confirm that the area close to this level is a strong buy zone.
WHY? Because we know that this area is a low but we do not know whether the price will go up from here or break this low and go further lower.
It is also possible that the price remains around this level for a few days and you get fed up seeing the price trading in a smaller range and exit your position and after that, the price makes a bigger move upwards.
Most people start trading based on the first step of this strategy (identifying the low) but the second and most important step of this strategy is to confirm the low.
For which it is important that you patiently study the price action for some time and see whether buying is really taking place there. And to understand that you can take the help of candlestick analysis.
Let's understand how.
You already know that buying and selling goes on in the market hours every second. Now in this buying and selling, whichever side dominates the other, the price will move in the same direction.
If you've followed me for a while, You must be aware of the importance of the body and wick of a candle. While the body shows strength, the wick shows rejection.
Now after identifying a low in an uptrend, You have to confirm a price action near that low that gives you evidence of the presence of strong buyers.
- Which you can confirm by looking at candles with long lower wicks formed near that low irrespective of the candle color. As I said in the sentence above, the wicks of the candles show price rejection. Now since these are lower wicks it means that the price is getting rejected from the lower level, meaning buyers are not letting the price go below this area, Which confirms buyers dominating sellers here. So here you can make a trading plan as soon as the high of these lower wick candlesticks is broken and you can consider the low of these candles as an SL.
Source - Another way of confirming the presence of strong buyers is to confirm the follow-thru candle that is breaking the high of the lower wick candle as well as the recent price action. This follow-through candle indicates that bulls are now ready to push the price higher once again. You should take a risk on the low of the lower wick candle even if it is a little big because if it is a trap of big players then the price may come back to the bottom of the follow-through candle and then it might begin its upward journey.
There are dozens more such patterns that can be discussed but there is only one thing that we need to pay attention to in the information we are getting from each pattern and candlestick. And that is whether the required market participants are there for a directional move.
Meaning for a bullish trend there should be a clear dominance of #bulls and for a bearish trend there should be a clear dominance of #bears.
Once you confirm this, you can plan your trade better with proper risk management and your chances of winning will be higher.
Also, keep in mind that you have to look for buying opportunities at the lows being formed in an uptrend and look for selling opportunities at the highs being formed in a downtrend. Taking care of these things will increase your winning probabilities and help you plan your trades better.
Thank you for being here and appreciating my blog!
English is not my first language. So sometimes I use 'Google Translate'. Please don't think that anything I have written in this blog has been copied from somewhere or is AI-generated.
Keep Learning, Earning, and Growing
Have a Happy day!
🙏