Irrefutable Law of Trading Success #7: Buy Low/Sell High

That seems pretty obvious. In the 10 irrefutable laws of trading success law number seven is buy low, sell high and we introduce another concept which is utilize positive reversion. Always trade around value. Let's talk about this. It's very interesting because you see people in their everyday life, and they have a strong sense of value. Before they buy a house, they do all kinds of research, before they buy a car, they do all kinds of research. They clip coupons, they become part of clubs and use points and all these sorts of things to try and buy low and when they sell, they're always trying to sell for the highest price, sell high. But then when we move into investing and trading, all that goes out the window, and everything becomes a FOMO, fear of missing out. Everything becomes about well, this is the hot thing, I'd better not miss it. But there's no thought given as to how to buy low, or how to sell high. Now ironically, if you look at retail traders, versus professional traders, professional traders usually have a strong sense of value and they fight, they fight to buy low as much as possible, and to sell high as much as possible. Let me give you an example, when I work with a lot of new traders, and they show me what they're doing, I see so many traders that trade breakout systems where they buy on a breakout, and then they sell on a trailing stop. When we buy in a breakout, we're buying at a high price. It's why the markets breaking out, we're typically buying at the highest price at that point. At that point, we're buying high, not buying low and then when we exit on a trailing stop or a stop of some sort, when our stop is triggered, it's because the markets making new lows. We're selling low. They're buying high and selling low. Ironically, I can take the system that underlies these decisions and I can just change where I buy and where I sell, and everything else can be the same. Market breaks out instead of buying it on the breakout, we can instead try and buy a pullback. So let it break out then let it pull back and buy low and when we get a signal that a trade might be over instead of just rushing out, a lot of times we can actually be patient and sell high. 

I just concluded one of our staple workshops, the Matrix Money Machine and in the workshop, I actually showed my students both sides of this with one system. The initial way I taught him with this system is we bought the breakout and they learned this. But then later on in the class, I showed him how, well let's let it break out, but then let's actually try and buy a pullback afterwards. Just buying a pullback instead of the breakout, improve the performance of the system by more than 25%, more than 25% just by changing the entry. Now the trade off is sometimes your market breaks out and if you don't buy the breakout, it just goes, never comes back. You can miss some of those trades and some of those are the best trades. That's the trade off. But what the data shows is actually waiting and buying the pullback. Yes, you miss some of those, but so much of the time, you're buying significantly better on entry and when you do this again and again and again, it adds up. Then we go all the way back to law number one and that's jackpot solve your problems. Well, it's much easier to create big R winning trades when you're buying low. One of the things we talk about with our students is it's just about the math. It's all it's about, it's about the math. Doesn't matter that you're on the hot trend, it matters what is the math. If the math works, you should do it, if the math does not work, you should be patient. What does this mean? Well, when I buy high, usually the math doesn't work nearly as well. My risk oftentimes needs to be twice as big for the same trade, where if I just wait, and I'm patient, and I buy low on a pullback, I oftentimes can double or do even bigger in improving my reward to risk ratio. The other thing that we've talked about here is value, we have to always trade value. This is a much longer discussion than we have time for today, but one of the things I want to say about this is people just trade, they have no concept of what is fair value. In our world, where I came from, everything is about fair value. I need to have some way of identifying what is fair value and I want to try and buy under that whenever possible and sell over that fair value whenever possible. 

With this law number seven, buy low sell high, utilize positive reversion, always trade value. Where are you at? Do you just chase? Are you constantly a victim of FOMO? Fear Of Missing Out? Or can you be patient? Can you let times when you know where the market is going to go, but the math doesn't work? Can you let the trade go? This is what great pros do. They're just patient. No wasted trades, no wasted effort. Just wait for it to line up and when it does, take it and if it doesn't, skip it. Where are you at on this? Do you have a framework of value? Or are you just buying and selling? These are questions you need to be able to answer for yourself. This is Trader Tip Tuesday, where every Tuesday I come to you with tips like today to show you how to take your performance to an elite level. I'll see you next Tuesday.