To trade in any market, there are multiple strategies that one can trade with. Many traders believe the most common and important way to trade is buying low and selling high. They search for the point where they believe the market has hit its lowest point, buy a share, then sell once it goes up. Essentially that’s a good idea, but pragmatically it is a lot harder and much less realistic. For a long term investment the former strategy might work.
Many times when we think we are buying low, the market just keeps going lower. It’s a dangerous game that can lead us to wiping most of our account because we just believe the market will eventually go back up.
The better strategy is to buy high and sell higher. You want to catch the market when its in full momentum swing.
What this means is when you see the market is going up in an upwards trajectory, for the short term, it is just easier to buy into the market and sell it higher. You have no reason to believe the market will go lower in the near future. Sometimes the less logical, the better.
Adam Robinson, entrepreneur, systems builder, wizard of global financial markets, talks on the podcast “The Knowledge Project”, explaining how sometimes when the market doesn’t make sense, people think they found a new market to hop on. They think since its going down it can’t possibly keep going down. That is untrue and forces people to close on their positions allowing the ones that rode the wave to make quick gains. It pushes the market to limits no one thought it could reach before.
The graph above shows an upward trajectory. It is easier to ride this wave than try to catch the high point and ride the reversal wave down.
On the graph below you can see how predicting when the market will stop going downwards and start going up is a difficult task.
The benefits of joining the momentum
As a trader you have two options, long or short. If you see the market is in full momentum swing in either direction, you can make X amount of successful short trades. When the Xth trade doesn’t go your way, you can just long your position and wait for it to go back up.
Trying to catch the low point is really tough and will result in only one successful trade. Statistically speaking, it’s much better to figure out what is the trend and then trying to go with it instead of trying to catch the reversal.
To recap, learn how to ride the wave. Take advantage of market trends to make quick gains. Predicting the reversal is much tougher than just continuing what has happened in the near past. Pushing a car up a hill will always be harder than pushing one down.