There seems to be some uncertainty about what bottom fishing and what bottom picking is. We just talked about the relation of trend trading and bottom fishing or picking. Trend trading won, of course. Now the question is up what exact type of trading or investing the bottom thing is.
A bottom picking in the inner sense has hardly any chance to exist, provided you have no prophet in your trader staff. Does waiting for the first turning of the price, the pivot point, count as bottom picking or is this mere swing trading? If the answer were yes, value investors and swing traders would be united…
Let’s assume that even buying a stock directly after a cliff dive of fifty percent is not picking but fishing. Is this strategy sound? From a gamblers perspective probably yes.
Often prices recover to where they started their free fall. In the adverse case they can only move near to zero. You never know where a price is headed, at least not with certainty, and the market always steers the price to an equilibrium from where up- and downmove are evenly likely.
A price cut of fifty percent for some substantially bad news seems to be the best guess the market could do. In other words, such a price cut is fair, and so it is also fair to buy at this price. The value investor does not take a bad gamble in this case. Seen from the perspective of probabilities this is a fine bet. But there is the waiting that is needed for the price to recover. Advantage trend trading.
The more proactive version of betting on value after harsh price falls is possible in the small cap market. Volatility is often greatly enhanced in the penny stock markets. Preselect some penny stocks that had seen higher prices already. We are talking here about more than a factor of two. Then pick only those that are showing new signs of life. This trading system is sort of swing trading for penny stocks, and it is probably the best penny stock system there is.
All you need is a facility to discover such trading situations. Don’t be sub-euphoric now because this newsletter costs something. Alternatively you could do the searching work on your own, but the writer motivates himself for his own trading with his writing and produces value for you. That’s what a value investor should be after…