Just Do Something: The Key to Mastering "Buy Low, Sell High"
Discover how DynaLogic's rules-based platform helps you overcome emotions and make smart investment decisions.
“Buy low, Sell high” seems so simple. We’ve heard it a thousand times. It simply means that an investor should aim to buy stocks at a low price and sell them later at a higher price, thus making a profit. Where I think investors get confused is in the interpretation of “low” and “high”. Most investors are thinking “low” means bottom, and “high” means top.
When a stock is going down, there is usually some negative news or comments that creates more sellers than buyers. As we watch the price of a stock decline, we might be thinking about buying the security, but our emotions take over and we don’t want to take a position in the stock only to watch it go lower; so, we do nothing, hoping to buy it cheaper later on.
The same is true on the upside. We watch the price of a stock race to the upside as the news coming out supports the stock price activity. We know at some point the stock will stop going up, but our emotions take over as we don’t want to sell too soon, so we wait, hoping to sell at a higher price. Sometimes waiting pays off but more often FOMO, Fear of Missing Out, takes over and we buy as the price is rising, and sell as the price is declining when all along, we should have been doing the opposite.
As Dan Ariely, Professor of psychology and behavioral economics at Duke University writes in his book, Predictably Irrational, a New York Times bestseller, “Our behavior is influenced by emotions, relativity, social norms, etc. And while these influences exert a lot of power over our behavior, our natural tendency is to vastly underestimate or completely ignore this power. These influences influence us not because we lack knowledge, lack practice, or are weak-minded. Quite the contrary, they repeatedly affect experts as well as novices in systematic and predictable ways. The resulting mistakes are simply how we go about our lives, how we do business. They are part of us.”
The genesis of DynaLogic was to design a platform to help investors overcome these emotions by building rules that track securities and issue buys and sells based on price movement by selling into strength and buying into weakness These rules follow the expectations of “buying low, selling high”.
Most recently, we added a Relative Strength Index reading to our signal technology. The Relative Strength Index (RSI), developed by J. Welles Wilder, is a popular momentum oscillator that is commonly used in technical analysis to identify overbought or oversold conditions in a financial market. It is a range-bound oscillator, typically oscillating between 0 and 100, and is calculated using the average gains and losses over a specified timeframe. An overbought position would be an RSI reading above 70, and an oversold position would be an RSI reading below 30.
The combination of a rules-based strategy, coupled with a momentum oscillator has helped to better define the quality and timing of our signals.
Let’s look at Apple (AAPL).
As you can see from the chart above, sell signals were generated during price increases and buy signals were generated during price declines. In no instance were Sell signals generated during price declines or Buy signals during price increases. Many of the buy and sell signals are aligned with overbought and oversold Relative Strength indicators.
It's time to take control of your investment journey and make emotionless, data-driven decisions. By subscribing to "The Investor's Compass," you'll gain access to our powerful DynaLogic platform and Relative Strength Index analysis. These tools will help you navigate the market with confidence, buying when others are selling and selling when others are buying.
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