Every investor and trader wants to get the most profit. One of the most profitable ways is to buy instruments when prices are low and sell when prices are high.
Unfortunately, investors and traders cannot predict with certainty whether the price of an instrument will rise to the desired level or fall. This is the importance of entry and exit strategies in trading.
One of the most widely used acquisition strategies is buy on weakness (BOW) and buy on breakout. What do these two mean and which one should you choose? Check out the following discussion.
Understanding Buying on Weakness
Buy on Weakness (BOW) is a strategy to buy stocks when the stock price is low or price cut. The hope is that stock prices will rebound so investors and traders can reap profits.
Buy on weakness is an aggressive trading strategy as long positions are opened before higher price action begins. The positive aspect of the BOW strategy is that if the stock actually rebounds. Investors get the most profit.
For example, BBCA’s regular price is 7,000 per share. For some reason, the price has dropped to 6,500 per share, so Investor A buys 1 lot of shares in the largest private bank. If BBCA’s share price rises to 7000 again, then Investor A can receive a floating profit of Rs.50,000.
The disadvantage is that investors do not know Price downtrend (downtrend) Will it continue or the stock will actually rebound? If what happened was the first situation Investors can lose and even their stocks can get stuck.
Therefore, a buy on weakness strategy should be used once you have thoroughly studied the technical and fundamental conditions of the target stock. To give you more confidence that the price of the instrument will rebound sooner or later.
Definition of breakout
Breakout is when the price of the instrument can break through the lower line (support line) or through the top line (resistance lineBreakouts are divided into two groups, i.e. real breakouts, i.e. breakouts followed by increased trading volume and false breakouts, i.e. breakouts that occur without increasing trading volume.
Buy on breakout as a strategy to buy stocks or other instruments. By buying a new instrument when the price is able to break through the resistance with a real breakout. Why should True breakout? Because if you open a buy position during a false breakout There is a possibility that this will happen. a downtrend (price does not increase).
In contrast to buying on weakness, which buys once the price is low in hopes of a rebound, Buy on breakout waits for a real rebound to occur before buying. The advantage is that the uptrend is confirmed to occur. But the downside is that investors or traders have to wait and the probability of profit is less than BOW.
Take a look at Figure 1 above. If you bought the stock with the BOW strategy, you would buy GGRM when the price was still IDR 40,000/per share. (The first white box) Party Samuel Sekuritas in a related post said there was potential. stock breakout at Rp. 45,000 and the price increase is expected to reach Rp. 49,000/share.
which means If you are using the buy on breakout strategy, you will have to wait for the GGRM price to rise to Rp 45,000 before buying. If the price really goes up to IDR 49,000, your profit will be IDR 9,000 per share (BOW) and IDR 4,000 per share (BOB).
Should you buy stocks on breakout or buy on weakness?
as an investor You can use both depending on the situation and conditions. If you believe that stock prices will rebound (reserve), then buy on weakness (BOW) is the right strategy. Wait for a breakout before buying. (buy on breakout) is better
And if you buy when weakening But what about the price going down again? if you have this There are three options you can do. The first option is to sell shares to reduce losses. second option You buy again with strategy. average down The third option is to leave it for a while.
How to recognize buying on weak occasions
Here’s how you can identify BOW opportunities:
1. Use a normal trend line.
The first method is to use the normal trend line. You can create this trendline by connecting the high or low price points of the instrument for a certain period of time. You can BOW when the trend line of your target instrument is below the normal price.
Although quite simple But this method is quite risky because trend lines cannot represent all market conditions. Trend lines are just the surface. It could be that instead of rebounding The price of the instrument will go deeper, so this method is often used by short-term traders.
2. Envelope compartment
The channel envelope is a technical indicator represented by two lines that surround the price line. One example of this technical indicator is Bollinger Bands. Bollinger Bands are technical indicators that show overbought conditions. (Buy over sell) and Oversold (sell over buy) through two extended lines above and below the price chart.
To use BOW, make sure the stock’s price goes down. But at the same time the demand is increasing. On the other hand, avoid buying stocks that are falling but not accompanied by increased demand. because that means It is likely that the share price will fall further.
You can only use the BOW strategy on high-quality stocks, such as those that are members of the LQ45 or S&P 500 index. Avoid using this strategy with fried and other illiquid stocks.
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