Buy The Dips

SEC Release IA-1092

What is Buy The Dips?

Buying dips refers to buying an asset after a price drop. Buying dips has different contexts and different chances of training, depending on the situation in which it is used. Some traders may say they buy the drops if an asset is in a strong uptrend in the long term. They hope the uptrend will continue after the trough or the downtrend. Others may use the expression when no uptrend is present, but they think an uptrend may occur in the future. Therefore, they buy when the price drops in order to take advantage of a potential future price increase.

Understanding Buy The Dips

After the price drops by a higher level, some traders and investors see the fall as a good time to buy the asset or to supplement an existing position.

The concept of buying dips is based on the theory of price waves. When an investor buys an asset after a decline, it buys at a lower price. These investors are counting on the market to rebound and will therefore benefit from the rise in prices.

Like all trading strategies, buying dips does not guarantee the investor will benefit. An asset can fall for many reasons, including changes in the underlying value of the financial instrument. Just because the price is cheaper than it once was does not mean that the asset has good value.

A stock that goes from $ 10 to $ 8 may represent a good buying opportunity, but it may also be the case. There could be a good reason why the stock fell, such as a change in profits, gloomy growth prospects, a change in direction, poor economic conditions, loss of a contract, and the list goes on. It can continue to fall … even down to $ 0 if the situation is bad enough.

Key points to remember

  • Buying dips refers to buying an asset after a price drop.
  • Buying dips can be profitable in long-term uptrends, but unprofitable or more difficult in downtrends.
  • Consider how the risk will be controlled when purchasing dips.

Manage the risks when buying the Dip

All trading strategies and investment methodologies should have some form of risk control. When buying an asset after it falls, many traders and investors will set a price to control their risk. For example, if a stock goes from $ 10 to $ 8, the trader may decide to reduce his losses if the stock reaches $ 7. They assume the stock will go up $ 8, which is why they buy, but they also want to limit their losses if they get it wrong and the assets keep going down.

Buying dips tends to work best in uptrend assets. Dips, also known as folds, are regularly part of an increasing trend. As long as the price makes higher lows (on withdrawals or troughs) and higher highs on the ensuing trend movement, the upward trend is intact.

Once the price begins to fall, the price has entered a downward trend. The price will be less and less as each dip is eventually followed by lower prices. Since most traders do not want to keep a losing asset, buying the downside is avoided by most traders during a downtrend. Buying dips in downtrends may be suitable for some long-term investors who see value in low prices.

An example of buying the dip

Take the subprime mortgage crisis that occurred in the mid-2000s. Meanwhile, many mortgage companies have started to see their stock prices plummet. Bear Stearns and New Century Mortgage were among the lenders who experienced a significant and steady decline in stock prices during this period. An investor who has regularly practiced a downward buying philosophy may have grabbed as many of these stocks as he could, assuming that prices would eventually go up and return to their pre-decline levels.

However, this never happened. Instead, these two companies eventually closed their doors after losing significant share value. New Century Mortgage stocks, for example, fell so low that the New York Stock Exchange (NYSE) had to suspend trading in their stocks. Investors who thought the $ 55 per share stock was a good $ 45 deal would have been unable to unload the stock a few weeks later when it fell below a dollar per share.

On the other hand, between 2009 and 2020, Apple shares (AAPL) went from $ 13 briefly to over $ 230. The purchase on the dips during this period would have largely rewarded the holder.

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