Most investment and trading books and gurus advise the same old Wall Street adage, “Buy low and sell high.” Well, of course anyone knows that to make a profit, you should buy a security at low price and sell it at higher price. Or as a trader, you could also short-sell a security at a high price and buy it back at a lower price. That’s easier said than done. But how do you do it? How do you identify a low or value price for a security? How do you know that the price may not go further down? How do you assess its potential upward move? Conversely, when do you know you should sell a security for potential maximum profit before it turns around? These questions all have a lot to do with the method you use to identify price levels to trade a security or open and close your position. Nevertheless, as an active investor or trader you need to learn a variety of methods to buy low and sell high.
In this chapter and in Chapter 8, we describe two main methods to analyze a security for best price level at which to buy or sell. These two chapters could play an important—even crucial—role in your trading success. Even as an active investor, you could use the methods we discuss in these chapters to monitor your portfolio; that is, regularly review the securities or ETFs that make up your portfolio. Using the information in this chapter, you should know which security has reached peak performance, which one’s not performing as expected, and which one has more potential. ...