Forex buy low sell high strategy

Buy the Higher Low and Sell the Lower High.

Position Trading based on technical set ups, Risk Management & Trader Psychology.

Article Summary: Trading in the direction of the trend and buying low while selling high are mutually exclusive. Because we recommend you locate the direction of the trend and find a good entry, DailyFX has a new concept for you to consider. Buy the higher low and sell the lower high. This article will provide you with methods to do just that to prevent you from catching a falling knife.

If you’ve ever heard a trader say that price can’t possibly go any lower, chances are they haven’t been trading for long. That’s not meant to be harsh but simply to say, no trader knows the future. What traders can do is recognize that patterns tend to play out and repeat over and over again which can lead to higher probability entries.

Learn Forex: Buy Low & Sell High Is Cute But Ineffective.

Chart Created by Tyler Yell, CMT.

One of the principles of every trader who enters an order, whether long or short is that they believe they’ve entered at a good price in relation to where they expect the market to go. One trader will be right and the other will be wrong if they entered at the same price with similar stops and limits. While there is no guarantee which trader will be profitable and which won’t, there are some things we can do to put the odds in our favor.

Learn Forex: Buy the Higher Low with Bullish Trend Lines or Rising Channels.

Chart Created by Tyler Yell, CMT.

Learn Forex: Sell the Lower High with Bearish Trend Lines or Falling Channels.

Chart Created by Tyler Yell, CMT.

Methods to Help Prevent Buying a Low Before It Goes Lower.

As stated at the beginning of the article, there is no crystal ball or Holy Grail. However, there are methods that you can use to stay on the likely right side of the big moves. The three methods we’re going to look at are pivot lines to identify support and resistance, RSI to understand directional strength, and trendlines or directional channels.

The purpose of these three methods is to help you avoid buying something that’s falling. On the other hand, selling something just because it’s rising can become a fool’s game as well. That’s why studying price action can give a big leg over investors or traders who feel pr ice “can’t go any lower”, which has been the rallying cry of many losing trades.

Pivot Line s for Support & Resistance.

Pivot Lines are a leading indicator of sort. In short, Pivot Lines are a famous indicator to help you forecast likely future points of resistance and support to limit risk and find profit targets. Rising Pivot levels overtime can help you find a significant higher low to enter a buy trade or lower high to enter a sell trade on.

Learn Forex: Pivots Clearly Paint Dynamic Levels of Rising Support for Entries Zones.

Chart Created by Tyler Yell, CMT.

Knowing that the Holy Grail doesn’t exist, Pivots are a helpful way to get a feel for the directional bias. Combining pivots lines with candlestick analysis is a preferred method of many traders to find strong entries with the trend. A short cut for new traders looking at price action is to fade long wicks (highlighted above) against the trend as they likely are a rejection of a price test and often end up carrying back price in the direction of the trend.

Relative Strength Index (RSI) for Directional Strength.

The Relative Strength Index is the utility knife of many traders. When the RSI crosses an extreme level and is making directional moves higher or lower, traders can look for strong entries that favor the RSI bias. One simple way to find a directional bias on RSI is to add a moving average or trendline to the RSI and find bounces off support or breakouts of the RSI for a high probability entry.

Learn Forex: RSI with Moving Average Added For Directional Bias.

Chart Created by Trading Central.

Rising or Falling Trendlines or Channels.

Trendlines and channels are nice and simple. The value of a trendline or channel is increased every time it is tested. When markets are moving higher a trendline is a form of support that can be used to identify buying opportunities. When markets are moving lower, a trendline is a form of resistance that can be used to identify selling opportunities.

The purpose of this article is to help you understand that buying low and selling high is not a given trading system. You may be buying something that’s about to go a lot lower or selling something before it skyrockets. Because price is the ultimate indicator, trendlines or channels can help you pinpoint a higher probability entry as opposed to a cheap entry which could end up costing you a lot if it continues to move against you.

Learn Forex: There Is No Guarantee you’ll get the Lower High You Want.

Chart Created by Tyler Yell, CMT.

Finding a directional bias through the methods above can help you pinpoint entries. There is nothing wrong with buying a low or selling a high as long as it’s in the direction of the prevailing trend. Trading against the prevailing trend is often more trouble than it’s worth so we recommend identifying the trend and then entering on opportunities with the trend.

---Written by Tyler Yell, CMT.

Trading Instructor/ Currency Analyst.

To contact Tyler, TYellDailyFX.

Follow me on Twitter ForexYell.

To receive Tyler’s analysis and educational s directly to your inbox, please sign up here.

Interested In Our Analyst's Best Views On Major Markets? Check Out Our Free Trading Guides Here.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Upcoming Events.

Forex Economic Calendar.

Past performance is no indication of future results.

DailyFX is the news and education website of IG Group.

A Look At the Buy Low, Sell High Strategy.

"Buy low, sell high" is famous investing adage about taking advantage of the market's propensity to overshoot on the downside and upside. Although it is very simple, it is difficult to execute. It is easy to say whether a certain price is low or high in retrospect, but in the moment, it is monumentally difficult. Prices affect the psychology and emotions of market participants.

For this reason, "buy low, sell high" can be challenging to implement consistently. Traders can use tools, such as moving averages and the business cycle.

Difficulties in Buy Low, Sell High.

There are famous examples of the market being driven to extremes, whether it is high prices during market bubbles or low prices during market panics. These proved to be excellent opportunities to buy low and sell high. However, there have been countless times when the market keeps trending in one direction, punishing those looking to buy low or sell high. What look like high prices one day may look like low prices another day.

Traders and investors must have a certain objective method to determine if prices are high or low. Humans are conditioned to follow the crowd. There is inherent difficulty in consistently buying low and selling high. When prices are low, sentiment tends to be overwhelmingly negative towards a stock. Many bullish holders are forced to dump their shares. Similarly, when price is high, it is difficult to conceive of letting go of a winner.

"Buy low, sell high" is misleading in some ways, as lows and highs only become clear in retrospect. There is always a bull who considers a stock price to be low and a bear who considers it high. Often, both sides make compelling arguments. The challenge for investors and traders is to determine which stocks are being driven to extremes by fundamentals and which are being driven by emotions. Mean-reversion strategies are more likely to work when price moves are driven by emotions.

Moving Averages.

One simple way to implement a buy low, sell high strategy is with the use of moving averages. Moving averages are derived solely from price, and they are helpful in helping traders and investors determine a stock's trend.

Using a moving average of a shorter duration and one with a longer duration can assist in helping traders buy low and sell high as well as protect downside risk. For example, one common method is to use the 50-day and 200-day moving averages. When the 50-day moving average crosses the 200-day, it generates a buy signal. When it crosses the other way, it generates a sell signal.

This is effective in helping a trader time his entry to the point when the trend is faltering. One issue for buy low, sell high strategies is buying or selling before the trend has fully exhausted itself. This approach sidesteps the issue.

Business Cycle and Sentiment.

An approach to buy high, sell low, more suited for long-term investors is to use the business cycle and sentiment surveys as market timing tools. The market follows a rather consistent pattern of moving from fear to greed over long periods of time. Times of maximum fear are the best time to buy stocks, while greed is the optimal time to sell high.

These extremes take place a couple times every decade and have remarkable similarities. These emotional cycles follow the business cycle. When the economy is in a recession, fear predominates as economic activity decreases. This is the time to buy low.

When the business cycle is in its expansion phase, economic activity is increasing. Typically, people are feeling optimistic about the future. This is the time to sell high. Sentiment surveys such as the Consumer Confidence Survey provide further insight into the business cycle.

Buy High And Sell Low With Relative Strength.

Whether you have a $1,000 or you manage billions, the relative strength (RS) technique is a popular and useful tool for comparing one investment against the overall market. But few individuals ever manage to use the technique effectively, because they fail to incorporate RS into a comprehensive trading strategy. In this article, we define relative strength, explain why it works and demonstrate how individual investors can employ RS strategies. This versatile tool can be applied to stocks, exchange traded funds (ETFs) or mutual funds.

Relative strength has long been known as a valuable investment tool. Jesse Livermore, in Edwin Lefebvre's 1923 classic " Reminiscences of a Stock Operator" , noted that "[Prices] are never too high to begin buying or too low to begin selling." In other words, stocks showing high relative strength are likely to continue increasing in price, and it is better, from Livermore's perspective, to buy those stocks than to buy stocks with falling prices. Since the time that Lefebvre wrote, there have been many discussions on the best way to calculate precisely when prices are high, on a relative basis, and when they are low. (Read more about this investing legend, in Greatest Investors: Jesse L. Livermore .)

One of the first quantitative calculations of relative strength appears in H. M. Gartley's "Relative Velocity Statistics: Their Application in Portfolio Analysis", published in the April 1945 issue of the Financial Analysts Journal . To calculate velocity statistics, Gartley wrote:

"First it is necessary to select some average or index to represent the broad market, such as the Standard & Poor's 90-stock Index, the Dow-Jones 65-stock Composite, or a more comprehensive measure … The next step is to compute the comparable percentage advance or decline of the individual stock in the swing … And finally, the percentage rise or decline in the individual stock is divided by the corresponding move in the base index and multiplied by 100, to give the "velocity rating" of the stock."

Velocity ratings are very similar to what we now call beta, the Nobel Memorial Prize-winning idea defined by William Sharpe. These steps also define the basic idea behind relative strength, which is to mathematically compare an individual stock's performance to that of the market. There are a number of ways to calculate relative strength, but all end up measuring a stock's momentum and comparing that value to the overall market. (For more insight, read Beta: Know The Risk .)

After Gartley, it would be more than 20 years until another study on relative strength was published. In 1967, Robert Levy published a very detailed paper, which conclusively demonstrated that relative strength works (or at least that it did during his test period of 1960-1965). He examined relative strength over various time frames and then studied the future performance of stocks and found that those that had performed well over the previous 26 weeks tended to also do well in the subsequent 26-week period.

As shown in Figure 1, buying and selling based solely on RS trendline breaks would have proven to be a profitable long-term strategy. Buy signals are shown as up-pointing arrows, sells are pointing down.

A monthly chart is shown because RS is best applied over a weekly to monthly time frame to avoid being whipsawed. In this example, buys are made when RS breaks a downward sloping trendline and sell signals occur when a subsequent upward sloping trendline is broken. This technique would have required only three buys over the 15-year period, all profitable. (For related reading, see Momentum and the Relative Strength Index .)

A more common application of RS is to rank order all stocks within an investment universe.

The first step in any ranking process is to calculate a value for RS. While the simple rate of change calculation works well, some investors prefer to use an average of the rate of change over multiple time frames, beta or alpha, which is a concept related to beta. The method used is not as important as consistently applying the formula. Rankings need to be done weekly to maximize gains and, just as importantly, to minimize losses.

Profiting From RS.

Under a defined-contribution plan, employees contribute a portion of their total pay toward an IRA. The employer may match part of the contribution. The total contributions are invested, often in the stock market, and the returns on the investment, which ultimately may be gains or losses, are credited to the individual's account. Upon retirement, the balance in this account provides retirement income. (For more insight, see the Introductory Tour Through Retirement Plans .)

Most of these self-directed retirement plans include tax advantages. In exchange for the tax benefits, the government defines strict limits on withdrawals from retirement accounts before you reach retirement age. This makes retirement accounts truly long-term investments and means they should be managed as such. Long-term management makes these accounts the perfect vehicle to apply a relative strength strategy, seeking market-beating gains while being able to accept risk.

If we assume that the employer offers a typical range of investment options, there might be a dozen different mutual funds available. To actively manage this account, the investor can calculate the six-month simple rate of change for each investment option along with a market index each week. The RS trader would invest all of the money in the account in the fund with the highest value.

The decision on when to sell and buy something else can also be based on RS. To avoid whipsaws, you could hold the fund while it is ranked as No.1, 2 or 3. If it falls to No.4 or below in a given week, it should be sold and the currently ranked No.1 fund purchased with the proceeds. When more than 12 funds are used in the calculation, the cutoff rank can be set at 25-50% of the number of investment options.

Buy Low, Sell High: A Look at Contrarian Trading Strategies.

Buy Low, Sell High: A Look at Contrarian Trading Strategies.

With many common trading strategies like range-bound strategies and break-out methods getting most of the attention in many popular internet communities, it might seem like there are reduced options for those looking to “buy low and sell high.” To be sure, there are many advantages to trading breakouts and ranges. Breakout strategies can be used to beat market participants in terms of catching long-term trends and capturing a majority of the profits and losses within those trends. Breakout traders are always looking for critical breaks of support or resistance levels as an indication that market sentiment is changing and that previous pricing valuations are no longer appropriate. But there are some risks involved with these strategies, as there is always the possibility that you will encounter a false break and this is the reason protective stop losses must always be used.

Swing Strategies as an Alternative.

Given these risks, it makes sense to look for some alternative methods that can be used in alternate market environments. “Since market conditions are always changing,” said Haris Constantinou, currency analyst at TeleTrade, “traders will not be able to implement a single trading strategy on each trading day.” There will be many instances where no breakouts or ranges are visible and any major impulsive moves have started to reach an exhaustion point. So, what should traders do in these instances? Stay on the sidelines and wait for market conditions to change?

Unfortunately, one of the main facts of forex market trading is that the market will never come to you (i. e. adapt to your pre-determined strategy). That is to say, the market will never alter its behavior to meet your trading requirements or investment criteria. The forex market is an active and dynamic place, so you will need to be proactive at all times and look for new opportunities as they develop.

One possibility is called the Swing Trading strategy, which will enable you to see trading opportunities when breakouts are just not occurring. Swing trading involves finding positions that capture gains (usually over smaller time frames) using changes in price momentum that work against the dominant trend. For example, buy positions would be initiated once a downtrend has reached an exhaustion point. To determine the exhaustion point, a few different methods can be used. Indicator readings might become overbought/oversold, or candlestick patterns might indicate major reversals (for example with a doji or evening star pattern). Conversely, prices might start to make lower highs in an uptrend, or higher lows in a downtrend.

Swing trading allows traders to buy low and sell high in ways that are simply not possible when using breakout strategies. Because of this, traders must act fast to capitalize on these positions, as swing reversals can happen quickly. Stop losses in these trades should also be kept relatively tight because the majority of the market’s momentum is working against the position.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.