Buy low, sell high. Obviously, this is how profit is made in a trade. Buy at a specific price and sell it at a higher price. But what most participants get wrong is they buy at the wrong price level. What I mean by this is that many market participants buy a stock when it is near All Time Low (ATL) or 52-week low thinking that it is a “Value” buy. The same participants are also afraid to buy the stock when the price is too high because it is “Over-valued”. In this newsletter, let us understand why buying at ATL can sometimes be a bad idea.

Buying at All Time Low

An All-Time High (ATH) represents the highest price a stock has reached since its listing, while an All-Time Low (ATL) marks its lowest recorded price.

Some investors seek to buy stocks that have declined significantly, believing them to be undervalued and expecting a rebound when others recognize their supposed value. While this strategy may sometimes succeed, it often fails because stock prices typically decline for a reason, even if that reason is not immediately apparent.

Market prices reflect all available information, and when a stock is trading at an ATL or consistently making new 52-week lows, it usually signals deeper underlying issues. Even if the fundamentals appear strong at the moment, they may deteriorate further over time, aligning with the stock’s prior price decline. Hence, blindly buying stocks at their lowest levels can be a risky approach without a thorough understanding of the reasons behind the decline.

Buying at All Time High

Buying at an All-Time High (ATH) or after a breakout often makes more sense than purchasing at an All-Time Low (ATL). A stock at its ATL always carries the risk of further decline, potentially reaching zero. In contrast, when a stock surpasses its ATH and continues to establish new highs, it signals potential upside momentum.

The ATH level has historically acted as a strong resistance. A breakout above this level suggests that something significant may have occurred, prompting the stock to overcome a crucial barrier. Once the ATH is breached, the price enters a resistance-free zone, where no historical supply levels exist. This breakout can often mark the beginning of a new and substantial trend, even if the stock has already made a considerable move to reach the ATH.

However, this principle holds true primarily when the stock’s fundamentals are strong and consistently improving. To participate in such stocks, investors can take long-term positions or enter on pullbacks using smaller timeframes. Most stocks break their ATH after a market correction, signaling the start of a new bull run. The stocks that breach their ATH early in this phase often have the potential to lead the next rally.

In my course How To Trade Breakouts and Pullbacks, I have explained how to assess a stock’s fundamentals, how to participate in them for long term or on smaller timeframes for short trades along with many other classical theories. If you want to improve your stock selection and learn how to participate in stocks using breakouts or pullback methods, do check it out using the link below.

For example, observe the Candlestick chart below of AJANTPHARM on Weekly Timeframe. The stock had previously made an ATH at price of 1628 in July 2021. Subsequently, after the price breached this level in July 2023, the price started an uptrend and moved rose till 3400 in September 2024.

In the chart below of MAZDOCK, the price made an ATH of 466 in November 2022. Then the price declined till 300 and rose till ATH again in June 2023 and breached it. Subsequent to the ATH breakout, the price rose till 1200 in September 2023.

After the price rose till 1200, MAZDOCK consolidated till May 2024 and gave a breakout again. Subsequently, the price rose till 2930 in July 2024.

Finding stocks that are making new ATH and have good fundamentals, can improve the probability of a trade succeeding. Rather than buying at a ATL or price making new 52-week lows, it is better to buy stocks making new ATH. Buy high and sell higher.

There are times when price correct and are making new 52-week lows. In such stocks, it is wise till the price breaks the ATH and then participate in them.