{"id":1769,"date":"2019-06-10T13:14:22","date_gmt":"2019-06-10T13:14:22","guid":{"rendered":"http:\/\/investspectrum.com\/uma\/?p=1769"},"modified":"2020-05-15T12:34:47","modified_gmt":"2020-05-15T12:34:47","slug":"a-beginners-guide-to-buy-low-sell-high","status":"publish","type":"post","link":"https:\/\/investspectrum.com\/uma\/a-beginners-guide-to-buy-low-sell-high\/","title":{"rendered":"A Beginner’s Guide to Buy Low, Sell High"},"content":{"rendered":"\n

A Beginners Guide to Buy Low, Sell High<\/strong><\/p>\n\n\n\n

 \u201cBuy low, and sell\nhigh\u201d, is foundational advice often given to beginning investors in order to\navoid losses and lock in gains.  In an\nattempt to reach that goal, a portfolio manager often draws from the discipline\nof technical analysis which at its core, focuses on the effects of buying and\nselling pressures on assets such as stocks, bonds and commodities.  Technical analysis is often contrasted\nagainst fundamental analysis which focuses on gauging the financial health of a\nspecific company or industry.  The two can\nalso be blended, introducing an additional discipline, economic analysis.  This post will explore the technical analysis\ndiscipline which is diverse.  However,\nmost technical analysis tools can be separated into either trend following or\nmean reversion categories.  <\/p>\n\n\n\n

Understanding how markets move <\/strong> <\/p>\n\n\n\n

Markets have two states of movement, either trending up\/down or rangebound. A portfolio manager must first use indicators specific to identifying the two states of movement. Think of these technical analysis indicators as tools. Having the right tools for the job plays a significant role in the success of the overall investment process.  Like using a hammer to drive a nail or a shovel to dig a hole versus using the shovel to drive a nail and the hammer to dig a hole.  Once an environment is identified, more specific indicators and methods can be used which may reveal further information about the environment. <\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Indicators of market\nmovements<\/strong><\/p>\n\n\n\n

Indicators are available to detect various traits of price\nmovement.  If \u201cPoint Z\u201d is higher than\n\u201cPoint A\u201d, then an uptrend may be present (though what happened in between\ncould play a role in the investment decision). \nTrends may be steady or could be choppy. \nEven within a choppy uptrend, it may have various degrees of width in\nthe swings.  Indicators exist that simply\ndefine a trend as being positive or negative and tools exist that define the\nlevel of volatility within the trend. \nRate of change indicators can identify the percentage movement over a\nspecified time period in order to identify trend.  These indicators also display momentum or if\nthe trend is speeding up or slowing down. Why does all this information matter?\nThe more informed you are as to what is going on with a market environment the\nbetter equipped you may be to make risk-adjusted decisions for your portfolio.<\/p>\n\n\n\n

Moving Averages<\/strong><\/p>\n\n\n\n

Moving averages (displayed below) are popular ways to identify trends because chart readers can easily see if the asset is above the moving average or below. If the asset is above the moving average the trend can be defined as an \u201cuptrend\u201d.  If the asset is below, it can be labeled as a downtrend.  The number of days used to calculate the moving average can vary in order to detect trends of various time frames such as shorter-term, intermediate or longer-term.<\/p>\n\n\n\n

\"200<\/a>
Created with TradeStation. \u00a9 TradeStation Technologies, Inc. All rights reserved<\/figcaption><\/figure>\n\n\n\n

Mean Reversion<\/strong><\/p>\n\n\n\n

The \u201cbuy low and sell high\u201d concept can also be conveyed through mean reversion methods.  In case that term is new to you, mean reversion simply means the movement is stretched, gone further than it typically does, and may soon snap back.  \u201cOverbought\u201d and \u201coversold\u201d are common terms associated with mean reversion methods.  If a stock is in a trading range, by definition, it reaches an upper point, or extreme and then goes down toward a mean or average.  It may then overshoot and go to a lower extreme, becoming oversold and then revert back higher.  This process may be repeated numerous times.  Trading ranges may be after an uptrend or downtrend has slowed.  These may lead to a full reversal in overall direction or the trend may eventually resume but at a different slope.  Once a trading range is identified, a portfolio manager must then be able to identify what constitutes the extremes or overbought and oversold zones.  Tools of the trade may include Stochastics, Money Flow Index, and RSI, among others (pictured below).<\/p>\n\n\n\n

\"RSI<\/a>
Created with TradeStation. \u00a9 TradeStation Technologies, Inc. All rights reserved <\/figcaption><\/figure>\n\n\n\n

Volatility Analysis <\/strong><\/p>\n\n\n\n

Tying the states of trending and trading ranges together may also involve volatility analysis.  If volatility is high enough a trend may be observed and at the same time, upper and lower extremes can too.  These are often referred to as trend channels (see below).  Modest adjustments to exposure are often the goal when trend channels are identified such as the adding of positions around the lower channel line or \u201cprofit-taking\u201d near the upper channel line.  <\/p>\n\n\n\n

\"Trend<\/a>
Created with TradeStation. \u00a9 TradeStation Technologies, Inc. All rights reserved <\/figcaption><\/figure>\n\n\n\n

Why does this matter?\n<\/strong><\/p>\n\n\n\n

Many investors take a hands-off approach to investing but\nthat puts hard-earned money at the whims of the changing trends, and some bear\nmarket trends can be devastating.  Active\nportfolio management, by way of technical analysis, often includes implementation\nof the tools discussed above. These tools detect periods of trending or trading\nranges.  Refinements with more specific\ntrading tools and methods within those periods can further increase odds of\npotential success in navigating the unknown waters yet to be seen. This\ncomprehensive approach to investing is used in Spectrum\u2019s management for its\nclients. <\/p>\n","protected":false},"excerpt":{"rendered":"

A Beginners Guide to Buy Low, Sell High  \u201cBuy low, and sell high\u201d, is foundational advice often given to beginning investors in order to avoid losses and lock in gains.  In an attempt to reach that goal, a portfolio manager often draws from the discipline of technical analysis which at its core, focuses on the […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[46,39,54],"class_list":["post-1769","post","type-post","status-publish","format-standard","hentry","category-market-research","tag-active-management","tag-technical-analysis","tag-trend-lines"],"_links":{"self":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/1769"}],"collection":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/comments?post=1769"}],"version-history":[{"count":10,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/1769\/revisions"}],"predecessor-version":[{"id":1783,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/1769\/revisions\/1783"}],"wp:attachment":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/media?parent=1769"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/categories?post=1769"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/tags?post=1769"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}