This Simple Rule of Trading is the Hardest to Follow

Often, it's easy to dismiss some of the most straightforward rules, especially when you hear them so frequently.

Trading is full of these types of lessons. Much of one's success in trading doesn't have to do with sophisticated technical models but rather simple rules that govern human psychology and help control one's actions.

And the most famous trading rule of all time is "buy low, sell high."

Many "sophisticated" investors dismiss this saying because it seems so obvious. After all, the goal of trading is to make money and to do that; you need to sell something at a higher price than you bought it. Why even bother with this rule?

Well, just like many "simple" things in life, this rule isn't actually all that simple... Or more accurately, it's not all that easy to execute.

While the idea of "buy low, sell high" is an obvious, logical fact, human psychology can interfere with this idea when trading.

It's easy to see why the "buy low" part can be difficult...

Here at HX Trader, we often discuss how human evolution has led us to respond to pain or negative feedback... sometimes as much as eight times more than positive feedback.

The evolutionary logic here is simple: Eat a good meal, and you're happy for a few hours. Be eaten by a saber-toothed tiger, and your evolutionary line (and perhaps the entire species) shall perish.

It's natural for human beings to be pessimistic and constantly expect the worst.

This is why buying into a stock in a free fall is tricky, especially if you already own shares.

Now, I could talk about the idea that you should buy stocks going higher, not lower. But remember, the core strategy here at HX Trader is to find stocks in long-term uptrends and buy them when they have suffered a short-term pullback.

Even with a stock in an uptrend, that natural pessimism can interfere – doubt can creep into investors' minds when it inevitably goes down, especially when it hits the extreme lows we like to look for.

However, the "buy low" part of the adage is the more accessible part of the rule and is of lesser importance.

The tough thing to do is "sell high."

As much as we get scared when a position goes against us, we get even more jealous when we see others making money or thinking we can make more. This is commonly described as "FOMO," or the "fear of missing out."

We're likely seeing it now, as the stock market has had a massive run!

Many major stocks are extremely extended from their 200-day moving averages or the "DMA."

The 200-DMA is a good indication of an intermediate-term trend in the market. Being above it (especially comfortably above it) for as long as we have means we are definitively NOT in a BEAR MARKET.

Does it mean we're going higher? Maybe, but at the minimum, it means we have a stable stock market environment.

Does it mean we are in a BULL MARKET?

It depends on how you define that term. When most people use the term, we think they mean a "bubble" environment. It's one where we see some crazy moves higher in stocks.

Admittedly, we are seeing some of that type of activity right now. That is across a relatively limited number of stocks though…

Remember that most of the time, the stock market goes up but is not in a "bubble." This was the case for most of the 1990s. We think we could be in a similar situation now.

All that being said, though, now is the time to remember the "sell high" part of the rule.

Many stocks are so overbought that even if we thought we were in the biggest, rip-roaring bull market of all time, we still would be advocating taking profits for trading accounts.

Executing the "sell high" part of the rule while you are making money is one of the hardest things to do in trading but also one of the most important.