Sunday, February 13, 2011
Buy when stock price down or when stock price up?
Local market started go down, many stocks fall below 30 days moving average, experience investor know opportunity will come. One of the strategy for short term trader is “Sell when stock go down, Buy when stock go up”. Many will think they should buy when market go down, but experience trader only buy when a stock started to move up.
The reason is if you buy when a stock price start to move down, you might end up catch a falling knife. For example, a stock fall from $3.30 to $2.80, would you buy at $2.80? If someone buy at $2.80 and the next day the stock price rebound, I would say he is a lucky guy. He may not so lucky every time. What if after he buy the stock, it keep falling to $2.50 and further down to $2.00 after few more days. What if the stock price stall at $2.80 for few months? Hence, it's wise to buy near the bottom and the best is only buy when the price just start to move up.
If you say, nevermind, I am rich and can afford to average down, I will keep on buying every 5% down until it reach $2.00. But doesn't it would be a lot better if one keep monitor the stock along the way when it go down and start to buy only when it rebond at $2.20 till $2.80, it would come with same result compare with the one average down, but more safer in later way. Because no one know if $2.00 is a bottom for this stock until it rebound at $2.00, what if it continue to go down to $1.50 after break below $2.00?
Hence, buying a stock should try to buy when it start to move up in price near the bottom, not the reverse. A right time to sell is when it start to move down when the price near the high end.