Everybody wants to profit from the market. And there is only one and only secret in order to consistently profiting from the market. It’s simple and most of people know about it, but only a few really consistently doing it. The rule / secret is :

BLSH (BUY LOW SELL HIGH)

Yeah, right ! Of course we are all know about it, but ‘knowing’ is not necessarily ‘doing’ and only few of us really squeeze profit from the market. Before I go back to this very point. Let’s see how we implement this BLSH secret.

Unique to the share market, there are 2 ways to do BLSH (Buy Low Sell High):

1. 

   Long for Up

   Buy first, sell later ( Known as LONG POSITION or “Going Long”)
   This is the ‘normal’ understanding: you buy first at low price then wait until price go up then selling it at higher price for profit. If the price going even lower than your buying price, then you make a loss.

   For example: You buy stock of Google (GOOG) for $100 each. You wait until the price go to $150 where you selling it. Then you make $50 profit.

   So, you ‘going long’ if you expect the market will go up.

2. 

   Short for Down

   Sell first, buy later ( Known as SHORT POSITION or “Going Short”)
   To do this, you borrow the instrument that you want to sell from somebody else, then sell it in the market. Then if the market going down, you buy at lower price from the market, then return the borrowed item to the rightful owner.

   For example: you expect stock of Yahoo (YHOO) to go down , then you decide to ‘go short’ to make profit. You borrow Yahoo stock from your broker and sell it for $30. A month later the price go down to $20. Then you buy from the market $20 and return that to your broker. You make $10 profit from downturn market !

   Hence, you ‘going short’ if you expect the market to go down.

By using both ways above, you can always profit whether the market going up or down. That’s the beauty of share market.

But what is it the one you sell and buy ? You could buy and sell a stock of a company, option, index contract, commodity contract, etc. This is what we call “trading instrument”. You may want to read Various Kind of Trading Instruments article if you want further info. It does not matter what kind of trading instrument that you use, the BLSH rule always apply.

Let’s go back to the matter that although simple not many people doing this BLSH. Let’s see the price of Apple Computer stock (AAPL) between Nov 2007 and Apr 2008, and let’s hear what is in the mind of most people:

AAPL Nov 2007 - Apr 2008. Source: Yahoo! Finance

• At A: “Look, AAPL has recovered and trending up now. Let’s ride this trend and buy some at $198!”
• At B: “Ups, it’s go down. But don’t worry, it will come back..”
• At C: “See, what I mean…. it will always come back”
• At D: “Well, man… this global financial crisis really hammered this stock… But’s it’s too late now (price $130), I have lost 15% of my money, better stick around and wait for bounce back….”
• At E: ($120) “Gee, I can take it anymore, man… I have lost 40% of money.. sell at market…”
• At F: “…. investing in stock market is risky and unpredictable….”

Is this sounds familiar ? Does the trader above doing BLSH ? Of course not ! The trader buy high and sell low… that’s not profitable.

If you have read most of article in this website you will know what should happened, here are 2 ways for quick answer as your better alternatives:

1. You have trading plan that set maximum lost (stop loss), say at 15%, and you will let the profit run. Then when you reach B point, that’s it you sell the stock for 15% loss. After “E” you will see that the stock start to trend up and for the same reason you buy at “A”, you buy again this stock after “E” around $130 and at “F” you will be laughing that you are at 30% profit (Net about 15% profit)
2. When you buy the stock at “A”, you also buy Put Option (see How Option Produces Profit for Trader for more detail) as protection. Then during the downturn, while your stock is going down in value, your put option is going up in value. At “E” you can ‘roll down’ the option (sell the option for profit offsetting the stock loss, then buy further protection at “E”). So at “F” you have net profit approx 30% less option cost…

As you can see, with proper trading plan or good strategy, 40% lost is actually 15% net profit or even 30% net profit. That’s why even everybody knows about BLSH, only those who knows the correct ways to apply it that gain the advantage !

Denis Kristanda