There are many strategies that traders use in order to profit from the markets. Probably the most famous is the bottom fishing strategy.

What is Bottom Fishing?

Bottom fishing is an investment strategy where traders look at assets which have recently experienced a drop in their price and are considered undervalued. The price drop could be the result of some unpredictable events that have made the market go into a panic, overall market decline or other causes. 

A bottom fisher is an investor who uses the bottom fishing strategy and speculates that the price drop is temporary and the asset will recover over time, resulting in a profitable investment.

The main premise of the bottom fishing strategy is to buy low and sell high. Many well-known traders follow this strategy (Warren Buffet, Ray Dalio etc.) and have created wealth for themselves using it. 

Although it’s a simple concept, the market can be very difficult to time correctly. Volumes of traders start trading with the goal of buying low and selling high and more often than not - they do the exact opposite. 

The reason behind this is that this strategy requires discipline and a longer-term approach. This strategy requires trading against the rest of the market and it can be difficult to stick to your plan and avoid joining the crowd.

Naturally, the price decline won’t always be temporary. Some assets will drop in price and never go back up to the levels they held before. That’s why it’s important to only choose assets that have actual intrinsic or extrinsic value that is higher than their current market price.

How to use bottom fishing as a trading strategy?

The bottom fishing strategy is often used by traders because it offers a higher profit potential compared to trading with assets that are at a fair price or overvalued. Especially in bear markets, it’s a very popular trading strategy.

Bottom fishing is often considered more of an intuitive strategy than one based on pure logic. However, there are some things that you should consider before deciding whether to try it out.

The most important thing to understand is that successful bottom fishers aren’t trying to buy the asset at its absolute low. Instead, they’re looking to buy the asset at a price where it has the highest probability of appreciation. This means that, even after buying an asset at a low, the price could go sideways or even further down for a while before bouncing back up. Many inexperienced traders panic at this point and sell for less than they bought the asset for, incurring a loss. Experienced traders perform a detailed analysis, they believe in it and stick with the trade until it brings them profits.

Value investing is the most commonly used bottom fishing method. Traders look at valuation ratios and project the asset’s future cash flow. They focus on detecting opportunities where the assets are priced incorrectly.

Example

A company offers technology that has great potential and has the management team to see it through, but they had a bad quarter due to an issue with one of their big suppliers. The markets lose some faith in the company and the price drops. 

A value investor might decide that the new price isn’t a valid representation of the company’s potential and that the price will very likely recover during the next quarter when the supply chain issues are resolved. They decide to buy the company’s stock and wait until it recovers to a price level that would be expected of a similar company.

Conclusion

Bottom fishing strategy is a great method of potentially making a lot of money by trading, as long as you keep these principles in mind:

• Choose assets that have long-term intrinsic or extrinsic value and have suffered a price drop due to some recent event which won’t last.
• Wait for the selling pressure to subside before buying.
• If the price of the asset drops slightly, avoid panic selling. You should do a thorough analysis before buying the asset, but once you do, believe in your decision and stick with it.

 

Sources Consulted:

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