Why do we wait for prices to go up?

Someone once asked me...

"Why do you wait for the price of the stock to go up before you buy it? If
you like the stock so much why don't you buy it now when it is cheaper".

Well that is a question that any sane person would ask, and it makes perfect sense why someone would ask a question like that. Isn't the whole concept of buying stocks to buy low and sell high? The answer is that even though you may believe a stock (and the company behind the stock) is good we traders need to know how the market thinks of them. It does not matter what we think, but what does the people in the market with money think... that is the key!

Perhaps you have heard good things about a company and their products, maybe something about a good management team, or perhaps they have released some incredibly good sales data. Some nice starting points for any investment research. But what does the market think about them? I'm not talking about analysts at the big investment firms (who may have their own agenda) but what do the people with money in their pockets and big investors think of the company?

To answer that question we read the tape. Yep, reading the tape (technical analysis of the charts). Understanding the price movement of a stock is reading right into the minds of the investors putting their money into (or taking money out of) the stock. It is important to remember that any stock price moves up or down for only one reason. And that reason is people moving their money... in or out of the stock.

The science of technical analysis of stock charts is the study of human behavior. By interpreting the movements on the charts we are seeing the greed & fear behind the scenes of the people with the money. When we see a stock price begin to fall and the number of people selling is tiny compared to when the price was going up that tells us that as a collective the majority of the money is "sticking with it". Only a small amount of people are taking money out. On the other hand when we see a large number of people (volume) taking money out as compared to the volume when the price was going up then we have a big warning sign before us. It is telling us that the mass collective thinking on the stock is to "get out".

So how does this benefit us? In every way it benefits us. We use the charts to tell us what the market thinks of a stock. And we do this by applying technical analysis to the charts. Technical analysis on the surface may sound very geekish, nerdy, or downright complicated. But what it is at its core is the study of people. It is nothing more than that. We only want to buy stocks that people are putting money into. This way we have a better shot at the price going up. Even a great company with good sales figures and super products can be a loser on Wall Street. To know a winner from a loser we have to know where other people are placing their money. Because in the markets we really care only about one thing.. to have the stocks we are trading go up.

So getting back to the original question. Why do we wait for the price to go up before buying? The answer is that we want proof that people are buying a stock before we hop on also. When we look at a chart and if I put some notes on it that says "wait for a break above a certain price" that means that the stock is currently in a state of indecision perhaps, and that we want to see a continuation of more money flowing into a stock before we jump into it. If we were to use the buy it now premise without waiting for a clear sign then we could be jumping onto a train that is dead and is not going to go anywhere.. We could be sitting on that train waiting for a long time before, if ever it moves up. And even worse it could go down. That is why we wait for the train (stock) to kick up its engine and blow the whistle that it is going to start moving. That is when we get on board. The charts tell us where the money is, and we want to be on the same side of the trade as the rest of the money. Forget about how you feel about a company. What you always need to ask yourself is "What does the market (money) think about the company".

A passage from Jesse Livermore in the book "Reminiscences of a Stock Operator"... (by Edwin Lefevre)

Not so long ago I was with some friends. They got to talking wheat. Some of
them were bullish and others bearish. Finally they asked me what I thought.
Well, I had been studying the market for some time. I knew that they did not
want any statistics or analyses of conditions. So I said: "If you want to make
some money out of wheat I can tell you how to do it"
They all said they did and I told them, "If you are sure you wish to make
money in wheat just you watch it. Wait. The moment it crosses $1.20 buy it and
you will get a nice quick play in it!"
"Why not buy it now, at $1.14?", one of the party asked.
"Because I don't know yet that it is going up at all".
"Then why buy it at $1.20? It seems a mighty high price."
"Do you wish to gamble blindly in the hope of getting a great big profit or
do you wish to speculate intelligently and get a smaller but much more probable
profit?"

They all said they wanted the smaller but surer profit...