Trick question for traders: Why people buy high and sell low?
Trick question? Well, everyone knows the secret to successful trading is buy when the price is low and sell when the price is high. sounds very logical and very easy to understand, right? In theory at least! in real life I hear people everyday saying things like:
- OMG, the market is red, I have to sell quick to cut my losses.
- or, the price dropped, thank God I had my stoploss in place.
- what's happening, why is the price dropping, when it's coming back up. OMG, it's time to sell?
- it's a blood bath, I've made a mistake, I sold everything and will buy back when everything is calming down
- is this coin still legit, why is everyone selling? and why is Bitcoin still rising?
- I bought at 10$ because everyone else was buying and now it's down to 5 bucks, why it doesn't go up over 10$?
to me it seems, in reality a lot of people buy when the price is really high, possible at the all times high, and the same people will sell when the price goes down.
Why do you think it's the case? What is your personal experience with that? Interested in your opinions. Thanks!
While buy low/sell high sounds good, the reality of markets is that while it can be done, it is usually only the smart money that manages to do it.
The reason why it feels like people panic buy at the highs is because they do. Humans are driven by emotion and the fear of missing out is more painful than the loss itself if you're flat. Dumb money buys when they shouldn't, then the smart money pushes it down and cleans up their stops when they're invariably triggered at the point they were not patient enough to wait to buy in the first place.
Check out this BTC/USD chart with the key psychological level of $1000 drawn in:
I've then marked the point where price broke through the all time highs. Do you remember the headlines when it broke that $1000? It was going to the moon back then. The herd just couldn't wait any longer and longed straight into the waiting sellers lurking above the panic buy level.
50% of your investment later and the pain way too much, those same smart sellers were waiting to soak up your pain at the other end. The eternal battle between the emotional dumb money and the support/demand based smart money. It's truly a beautiful thing to analyse!
Now look at the price action around each new high in this epic bull market. Can you pick the smart and dumb money coming in?
I think the simple answer is fear.
Fear of missing out when the price is going up - so they buy.
Fear of losing the invested money when the price drops - so they sell.
Fear leads to buying high and selling low.