The first thing most people learn about investing is "buy low, sell high." It is unquestionably true that you will do well if you can apply that approach to stocks, but there are many very successful traders who take a different view. Rather than trying to buy low, they focus on buying stocks that are hitting new highs and look to sell even higher.
That approach is a subset of momentum trading, but it is based on the same belief that strong stocks tend to stay strong. The words "blue skies" are often used to indicate that no one owns the stock with an unrealized loss. Everyone has gains, so why should they have any great desire to sell?
Another reason this approach works is because stocks are not valued efficiently. The market does not instantly recognize and price in positive news. There is a tendency to recognize positive development incrementally. Analysts tend to raise price targets gradually and investors tend to gain confidence with time. This is why a chase of a big gap-up bar will open.
There is also a psychological aspect to buying stocks that are at highs. Many people have a desire to associate with "winners." They like being surrounded by the stocks that are the "best" in the market, and what can be better than a stock that is at all-time highs?
There is a herd mentality to these stocks that is not unlike a Ponzi scheme. As long as there is a supply of new buyers, the stock can move higher. It doesn't matter what the valuation might be as long as there is sufficient buying demand. The big winners will always have a supply of buyers, but the pretenders can crash and burn very quickly.
These are all good reasons why the "buy high, sell higher" approach can work, but the main reason to use this style is that it is the only way you will be in the biggest winners.
The stocks that are the biggest winners must trade at their highs quite often. A stock like Apple (AAPL) or Amazon (AMZN) cannot go from $6 to $1,000 unless it is trading at its highs constantly. If you use a "buy low, sell high" approach, you will never be in the best stocks when they are seeing their biggest growth.
Many traders can tell you about how they bought a stock like Apple for a few bucks and sold it after it had tripled and then watched as it went up another 30-fold because they were waiting to "buy low."
The psychology of buying new highs can be a struggle. Why not just buy every stock that hits a new high on a large surge in volume? It seems too simplistic to work, but there are computer algorithms that do just that and they make this approach self-fulfilling to some degree.
As consumers, we are always focused on finding the "best price," which generally means the lowest price. That doesn't translate to the stock market. The "best price" is often the highest price when we are trying to find a bargain.
One thing I have found is that the psychology resistance to chasing can be overcome by making small initial buys in stocks that you are worried are too extended. Once you have a position, you tend to look at the stock in a different manner, making it easier to add as it develops further.
The "buy high, sell higher" approach is not inherently superior to other approaches. It depends to a large degree on the trader. Some people will always struggle with buying highs but will do well at finding bargains and stocks that are mispriced.
Overcoming the natural resistance to buying stocks at all-time highs requires some effort, but if you try it on a small basis to start, you will be surprised at how your attitude may shift.
