Suppose you find a stock (Corporation “X”) that displays cyclic pricing behavior.
For arguements sake, suppose you find that the stock trades in thge range of $10-$15, and that this behavior has gone on for several years. You decide to take advantage of this, so you set up a scheme like this:
you buy when the stock is at $11 or below. You then sell when it hits $14/share.
Obviously, each time you see you clear a profit of $3/share.
You are (of course) only one of millions of investors-and others have been watching the stock. Would the adoption of such a trading scheme cause the stock to cease fluctuation? All of those buy orders at $11 would push the prices up, as the sell orders would push it down.
So, does this tend to happen (that speculation tends to flatten the price behavior of stocks)?
Eventually, such a stock would become less volatile-is this behavior utilized by the big mutaul funds?
I do not claim any market expertise but the short answer, I think, is No. For one thing, something the market might be “telling” you with this up-and-down motion is that in future stock may go down-and-down. (A strategy closely related to “play the stock which goes up and down”, by the way, is “play the stock which goes up and up”. This was widely adopted in the 1990’s by fund managers hailed as geniuses, even though their strategy, which their clients later regretted, could have been more-or-less emulated by any 3rd-grader trained to look for plus signs.)
A useful analogy, perhaps, might be the well-known martingale system often used against casinos. With a martingale you actually do figure to win most of the time! Similarly, you might be likely to win money for a while playing stocks the way you suggest. That doesn’t mean it’s a good idea.
Warren Buffet is generally regarded as the smartest stock investor. A good sanity check for stock-playing methods is to compare with his.
(Having written all this, I’ll mention that I made money in the 1990’s playing your buy-low/sell-high game with Philip Morris stock. Buy whenever some cancer widow gets a billion-dollar settlement, sell when stock recovers. The method seemed win-win since even at high prices MO was hugely undervalued. The market seemed to worry that Congress would eventually punish tobacco for its perfidy; instead Congress preferred to pick on innocent companies.)
Assuming you could find a stock with a predictable price pattern as you described, then yes, buying and selling pressures would eventually remove any profit potential. Over time, markets are quite efficient at arbitraging away predictably profitable anomalies. They are never entirely removed, though, mainly because of (1) market frictions (e.g., the profit has to be enough to cover brokerage commissions), and (2) completely predictable patterns are rare (some would say non-existent), as there is usually some degree of risk or unpredictability.
Putting aside such concerns, and assuming that the cyclical behavior you describe is entirely predictable, then you profit by buying the stock when it is at $11 and selling at $14. Once someone else figures this out, they will undercut you by buying at $11.01 and selling at $13.99, for example. Then you decide to undercut them, and buy at $11.02 and sell at $13.98. This pattern goes on with thousands of investors, until very quickly people are buying and selling at the mid-point, or around $12.50. Essentially, buying pressure will push the purchase price up, and selling pressure will push the selling price down until all profit opportunity disappears.
This is a very simplified example, but hopefully it gives you the idea. So, while such opportunities do exist, they are usually short-lived. The way to make money in such cases is to be the first to discover the anomaly (and do not tell anyone), or to be able to transact more efficiently or cheaply than competitors.
P.S. If you do find such an anomaly, be sure to post details. 
But Warren Buffet isn’t a day trader, so it’s a bit of apples and oranges, isn’t it?
I think my point was that he’s making a lot of money with his apples, not with Ralph’s oranges.
bwuh? There are successful short-term traders, you know, and just because Buffet is the best at his particular game, it doesn’t mean Ralph is foolish for wanting to play a different game.
Thanks for the replies.
I have begun to trade this way-my reasoning is that it is better to gain a 1-2% profit/week, than to hold for 1-2 years in anticipation of a 10-20% profit.
I always look for stocks that trade at least 1 million shares/day-my reasoning is that I can ride on the mutual funds.
I am hoping that the recovery will push the DJA up above 12000, and that the market will become more volatile-this makes surfing easier.
For those interested, you might consider stocks like Pier One Imports-it has shown quite a bit of cyclical behavior-since January (I have bought and sold 6 times, each time clearing a profit).