Bottom Fishing : Definition and Strategy

Asset prices are volatile and fluctuate wildly, experiencing both positive and negative fluctuations. There is uncertainty in the cryptocurrency market as to whether it is worth investing now or if it would be better to wait for a correction before buying in.

With crypto prices dropping steadily, it is currently unclear if this is a temporary lull before the next bull run or if we’re going to be stuck in a bear market for an extended period of time.

Despite the fact that nobody can predict market bottoms and tops, some speculators believe that getting in on a position near the bottom or top of a trend is the only way to capture significant gains during a reversal.

Traders employ many strategies to profit from the markets. The most famous of these is bottom fishing.

Understanding Bottom Fishing

Bottom fishing is one of several techniques used in the stock market that involves buying stocks when they are at their most condensed or discounted levels.

This term usually refers to buying only when a stock has dropped significantly from its original price, but it can also refer to buying stocks at any price if the company’s financial situation is strong enough to support a rebound.

The basic principle of the bottom-fishing strategy is to buy assets that are undervalued and sell them when they become overvalued. This strategy helps investors make money in the market with relatively low risks.

What is Bottom Fisher?

A bottom fisher is a speculator who looks for bargains among stocks whose prices have recently dropped dramatically. The name comes from the fact that bottom fishing implies that there are plenty of bargains left to be found in the stock market, even after recent price drops.

It is important to understand that a successful bottom fisher is not looking to buy a depressed security at its absolute low but rather buying it when the security has the highest probability of appreciation.

Bottom Fishing Strategy

Because of the potential for greater profit when crypto prices fall, it is common for investors to engage in bottom fishing in prolonged bear markets.

Fundamental Analysis

Investors analyze assets and their intrinsic values. They buy assets that appear to be trading at a significant discount, analyzing their financial prospects for the next couple of years.

Investors can utilize fundamental screeners to filter stocks based on defined parameters, such as price-to-earnings ratio or dividend yield. After eliminating unsuitable candidates, investors can research each one individually and choose stocks that suit their risk profile and return objective.

Technical Analysis

Some traders determine stocks that have experienced a significant price decline and are oversold, which may be attractive bottom fishing opportunities. For example, a company may report lower than expected quarterly financial results, causing its stock price to fall.

Some traders notice that the selling pressure has started to subside and decide to take a long position in order to capitalize on the short-term rebound expected by the market.

Techno-Fundamental Approach

Investors can use a combination of technical and fundamental analysis to invest in beaten-down assets. In the techno-fundamental approach, investors will screen their investment universe using technical criteria and then further evaluate the results using fundamental parameters before choosing which assets to buy.

This strategy is more successful and effective than traditional methods for analyzing stocks because it can provide opportunities that other methods miss.

Ripple (XRP) Potential Turnaround

The XRP/USD  pair formed a double-bottom at $0.65 on June 22, rebounded toward its neckline resistance at $0.75 and fell again to log a second bottom level at $0.51 before breaking out of the range.

On July 20, the XRP price surged 77.39% to $0.91 after bottoming out at $0.514. The cryptocurrency gained most of its value in the wake of an overall market uptrend led by the launch of Ethereum’s software update.

The Risks of Bottom Fishing

While bottom fishing can be extremely rewarding, it entails certain risk. In cases of extreme market movements, beaten-down assets may not recover and may decline in price, damaging investors’ capital.

If the price of a security declines beyond its intrinsic value, it may never return to the price at which it was purchased. In the case of stocks and bonds, for example, such investments may become completely worthless, leaving investors with damaged merchandise. Such opportunities are also referred to as “value traps” in the investment community.

Although bottom fishing can be profitable in the short term, it is a risky strategy that is opposite to the momentum investing approach and not suitable for all types of investors.

Bottom Line

Over a shorter period of time, bottom fishing provides a bigger payout than regular investments. In the event that the security declines further, the potential return is greater and faster than it would be with regular investments.

If done right, bottom fishing can make investors quick profits and big returns. However, investors should be aware of the risks involved in such endeavors and know what they are getting into beforehand.

There can be no easy exit from such investments, and there is no guarantee of profit.

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About the Author: Micky Aron

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