3 steps you can take reduce the discomfort of buying low
“Buy low and sell high“ is a ubiquitous and perhaps one of the oldest of the Wall Street quips. Everyone knows that is how to make money trading stocks, right? ;) But is it really that simple?
The idea of buying low is attractive. I get it. It feels smart to pick the bottom. But trying to pick bottoms very often leads to poor entries and big losses.
For example, a family member texted me recently inquiring about $SQ Block Inc. It’s price had been heading lower and he was asking at what price would it be time to buy.
STEP #1 — Let the trade setup
This was my response:
No target here. It’s heading lower and lower, below all the moving averages, all the moving averages sloping downward. Absolutely nothing to like here. You may be able to buy it lower, but don’t worry about trying to pick the bottom. Let the bottom come in and then try to buy it on the way back up. You have to let the trade set up.
STEP #2 — Set your stop
After seeing price action the following day I noticed an opportunity. So I thought I would take the chance to share a responsible method of trying to buy a beaten down stock.
Here’s the text from that morning:
Since we talked about it I thought I would point out this potential “bottom fishing” play for $SQ. Not recommendation, just an example.
Terrible day Wednesday, flushed way down and it’s very extended away from the 8 and 21 exponential moving averages (yellow and blue line with red shading in between). Yesterday’s action took it lower and then it reversed and moved higher on the day and back over the previous day low. Good sign, it’s a start. The trade here is to buy some now using yesterday’s low as the stop.
-Note, at this point in the morning the stock was trading at approximately $143 per share-
Step #3 — Set targets and cover your risk
The first target will be back to the price area between the 8/21 MAs. That may be all you get before it goes lower. Or maybe the bottom is in. Who knows? Have to watch and see.
The last part of that plan is to move very quickly to sell some and cover risk. So if you’re buying now at $143, and the stop is $138–5 points away — then you sell half your position at $148–5 points higher. Then your risk is covered and you can let the remaining shares ride. If it reverses lower and stops you out its a breakeven trade. No harm, and you move on to the next idea.
That day price did move up quickly giving the opportunity to sell some shares to cover the initial risk. With risk covered and a proper plan in place it is easier to sit with the position regardless of what happens.
SQ,Daily Candlestick chart published by Andrew Moss
Block, Inc. Candlestick chart created with TrendSpidershare.trendspider.com
This post was created with Typeshare