Buy low, sell high strategy's explanation
One of my favourite swing trading strategies is to buy low and sell high during an uptrend. The same strategy can also be used when trading downtrends, only that you would look to sell high and buy low.
You may be asking yourself “But, how do I know how low to buy, how high is high enough to sell?”
We’re going to answer that now, but first, let’s take a closer look at how trends develop.
There’re two main types of trends: uptrends and downtrends. Uptrends are characterised by the price making consecutive higher highs and higher lows, while downtrends are formed by consecutive lower lows and lower highs. The absence of a trend is called a ranging (or sideways moving) market. In this strategy, we’re interested in higher lows during uptrends and lower highs during downtrends. Higher lows during uptrends are the “lows” we’re looking to buy, and lower highs during downtrends are the “highs” we’re looking to sell. The following chart shows an uptrend with higher highs and higher lows. Higher highs are marked by points no. 2, while higher lows are shown by points no. 1. With this strategy, you would look to buy at the lows marked by (1) and sell at the highs marked by (2).
Higher lows usually form around recent support zones or previously-broken resistance zones that now act as support zones. Look for those important technical levels when trying to identify the low of a higher low.
Many swing traders also use Fibonacci retracement levels to identify where a higher low might form. Draw a Fibonacci retracement tool from the low of the previous higher low to the high of the previous higher high (the so-called “impulse move”).
Your trading platform will automatically draw Fibonacci levels on your chart. Look for the 38.2% and 61.8% Fib levels as potential retracement levels for the price.
Bear in mind that strong trends tend to have shorter retracements and could find support at the 38.2% Fib level, while weaker trends usually have larger retracements that may reach the 61.8% Fib level.
The chart above shows a higher low formed around the 38.2% Fib level during a strong uptrend. A stop-loss level should be placed just below the higher low, while the recent higher high could act as the first profit-taking target.
If you want to hold your trade longer, then bear in mind that the Fibonacci levels above 0% (so-called Fibonacci extensions) often act as a resistance for the price and can be used as profit-taking targets.