Human Nature

One of the reasons why most traders fail is their belief that to make money in the markets they need to buy low and sell high. This no doubt stems from modern day living shopping for bargains.

If a car is on sale for $20,000 when it was $25,000 a few months ago, we are more inclined to buy because we’re anchored to the higher price. This natural human trait induces investors to buy stocks as they decline in price.

If a stock can be bought for $20.00 when it was trading at $25.00 a few months ago, it is logical to think it can get back to $25.00, based on the simple premise that it has been there before. The irony is that the share price of a company heading for bankruptcy must also drop from $25.00 to $20.00 and then from $20.00 to $15.00, and so on to $0.00.

As shown here, the odds of making money are higher when we attempt to buy high and sell higher, rather than attempting to buy low and sell high.