The concept of buying the dips is a day trading technique designed to profit from market fluctuation. Because of market volatility, it is believed that any given dip in the price of a stock will reverse and the price will go back up to previous levels if not higher. By purchasing stocks just after the dip occurs, investors are trying to buy shares at a discounted price and fulfill the Wall St adage of “buy low and sell high”.
As with any day trading strategy, buying the dips is not guaranteed to produce a profit because some stock prices may continue to fall. This continuation may be the result of negative company fundamentals or overall market weakness. For example, traders who followed this technique during the dot.com bubble may have made money only to realize a net loss as the prices of these stocks collapsed and never did recover. The reason for this is that these internet stocks fell below support levels. As a result, the lower stock price was a selloff not a dip.
The buy the dip trading technique is dependent upon the stock price retreating to a previous support level and then going higher. To capitalize on this strategy, a certain amount of technical analysis of the stock price is necessary and may require that you wait for confirmation before executing your trades. It is important to determine if the pull back in price is a dip or a sell off before committing capital. Before the trade is executed, determine the amount that you are willing to lose should the trade go against you. Once the trade is entered and the stock price increases, sell shares into the rally locking in profits.
Another buy the dip day trading technique doesn’t require technical analysis. It relies more on intuition. Once a stock price has stopped retreating and has started rising again, you enter the trade. This technique assumes that a certain amount of increase will occur. In this day trading technique, it is important to remain vigilant as the increase in price may be extremely short lived. This technique is usually best employed earlier in the day as market volatility tends to be greatest during the first hour of the trading day.
Buy the dip is a long-term investment strategy that can be adapted to a shorter time horizon to meet the time frame of a day trader.
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