“Sell High, Buy Low”

We’ve all heard the “Buy Low, Sell High” mantra, but what about selling when things look frothy with optimism and awaiting a better buying opportunity in the future. When this comes to mind there are two very important questions one must consider.

1. Am I really smarter than the market? Many traders and speculators follow trends and technical analysis to dictate their trading. The problem with this is simply that the markets don’t usually move in tandem with the charts. As a matter of fact the largest moves, be them up or down, are usually when many investors are out sitting on the sidelines for a better buying or selling opportunity. I don’t have a good chart to prove this to you (funny that its not often that traders boast their records of chart predicting), but consider how many investors were ready for the 9/11 attacks, the Oil Embargo in the 70s or the breakout of a World War.

2. How much will I gain by doing so? This boils down to a very simple equation of numbers. Will I end up with more or less than I started with. Although this may seem quite obvious in the beginning, considering that one is truly selling high and buying back low, it is nevertheless of extreme importance to account for accuracy (if you know someone who has timed both a top and its bottom I’d love to meet them), Spread between the Bid and Ask (you will usually buy slightly above the price and sell slightly lower and, of course, one must configure trading costs, commissions and taxes.

Here’s a simple equation to figuring all this out:

Ne = Nb x (Pb/Pe) x A² x S²

Ne – The number of issues at the beginning of the trade
Nb – The number of issues at the end of the trade
Pb – Price at the beginning, before selling
Pe – Price at the end, before buying again
A – Accuracy (5% accuracy would be .95)
S – Spread (a 2% premium would be .98)
2 – These numbers are squared for both trades
Trading costs and taxes must then be configured, as well as commissions if necessary.

The complete article can be found here.

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