Why is Buying Low & Selling High So Elusive?
The objective is simple and seems so easy to achieve – - buy low and sell high, or sell high and buy low. But the ability to do this is quite elusive. What is high and what is low?
The methods used by W.D. Gann are unique in quantifying the answer to these questions and are based upon the long-term price history in a market. He derived his definitions for what is overbought and oversold based upon the actual moves which have taken place in the past. At first blush, this may not seem like an earthshaking revelation. But when you consider the infrequency with which investors, traders and analysts look back beyond 10 years, let alone 60 years, the distinctiveness of Gann’s forecasting methods is brought into the light.
To provide a foundation for why his analysis is so profound, we must first understand the basis for why it works. Once we do this, you will understand why the methods discussed in the lessons concerning time periods, the Master Time Factor , price formations and value relationships are so powerful.
The Challenge to Us as Investor’s and Speculators
The first challenge for the investor or speculator is quantifying what is low and what is high. The second is having the emotional makeup to buy on weakness when everything looks grim and sell on strength when everything looks rosy.
When the legendary Green Bay Packers coach Vince Lombardi gathered his professional football players in the first pre-season meeting, he started his instruction by saying, “This is a football.” Indulge me while I do the same by making this statement: “The place to buy for the greatest return possible is at the bottom of a bear market after the trend has turned up and at the bottom of periodic major corrections during a bull market.” The reverse is true when selling short: “The place to sell for the greatest return possible is at the top of a bull market after the trend has turned down and at the top of periodic major corrections during a bear market.”
1st Principle: Human “Weakness” at the Center of Market Movements
In order to solve the mystery to unlocking the markets’ riches, there are two foundational principles that relate to people.
The first principle is this: When it comes to money, 98% of people are driven by the three controlling emotions of hope, desire (greed) and fear. To succeed in speculation, not only do these emotions need to be controlled, but the investor or trader must learn to do the opposite of what his instincts tell him or her to do based upon these emotions.
When a market is declining and marketplace participants (”the crowd”) are fearful, the successful speculator must be able to steel his emotions and look to buy based upon hope. When a market is advancing, and the crowd hopes for a much greater advance, the successful speculator must steel his emotions and fear the possibility of losing hard-earned profits based upon the likelihood of an imminent top.
The twin demons of desire (greed) and fear ask questions like these:
- “Do you realize what you can get (freedom, wealth, power, fame) if the market continues to move in your favor and you make such and such an amount of money?”
- “Do you realize what you stand to lose (freedom, wealth, power, fame) if the market continues to move against you and you keep losing money?”
In the first, the trader throws caution to the winds without regard to risk and ends up overtrading. This is the biggest mistake one can make in the market. In the second, the trader panics out, invariably at the wrong time. When market decisions are made on the basis of these two driving emotions, the tendency is for the trader or investor to buy the highs and sell the lows – decisions based on feelings rather than facts.
2nd Principle: Trading Opposite the Crowd at Strategic Turning Points
The second principle is the real key to understanding why you can be successful. Since the vast majority of market participants are motivated by the same three emotions, they tend to do the same things at the same time in the marketplace. As a result, they demonstrate a herd mentality and move in and out of a market as a “crowd.” Their collective optimism carries prices to overbought levels and their collective pessimism carries prices to oversold levels. Quantifying the extent to which the crowd will do this in a given market situation is where W.D. Gann’s analysis comes to life. By defining the degree to which culmination points have carried prices historically, we can harness wealth-building moves like at no other time in history.
The old Wall Street maxim states, “Buy on rumor, sell on fact.”
In general, we must sell when good news comes out and buy when bad news is out. The market almost always discounts the news in advance, except when it is sudden and unexpected.
The extremes of optimism and pessimism are described in the classic volume, Extraordinary Popular Delusions and the Madness of Crowds. The madness occurs anytime the thoughtful reasoning of the individual is replaced by the unthinking crowd. In the markets, when these emotional extremes occur, opportunity is at its greatest. Such emotional extremes coincide with great culmination moves followed by dramatic turning points.
What Gann Said about Human Nature
W.D. Gann put it this way,
“If you will only study the weakness of human nature and see what fools these mortals be you will find it easy to make profits by understanding the weakness of human nature and going against the public and doing opposite of what other people do.
“Human nature never changes and that is why prices swing from the one extreme level to the other. People get too hopeful and optimistic when prices are high. Then when prices reach extreme low, they get too blue, too pessimistic and over-sell.”
In the arena of investing and speculation, reality is literally turned upside down. One of the great character qualities that have made the United States so great is hope. The entrepreneurial spirit maintains hope and resolve in the face of seemingly insurmountable adversity and challenges. This indomitable spirit is the engine behind innovation. Unfortunately, this same character quality is disastrous in the arena of investing and speculation. Holding doggedly to one’s opinion in the markets is one of the greatest causes of losses on Wall Street. The markets demand submission and flexibility.Read the Entire 8-Chapter eCourse
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