In the world of trading, you will probably have people telling you to “buy the dip.”
Don’t worry. It is not as nonsensical as it sounds. While it may seem like something unrelated to trading – I know it occasionally makes me think of nachos. I can assure you it is a good buying strategy that you need to employ, which is why I have put together some handy info and tips so you can buy the dip and make a strong start in your investment journey.
What is The Dip?
So what do we mean when we say “buy the dip”?
Essentially, you choose to buy your cryptos and stocks at the time when their price has dropped, but what’s more important than just a lower price is that the stock has the potential to rise again.
Let’s take a look at a specific example:
- On 07/05/2021, the Disney (DIS) stock stood at 184.71.
- Twelve days later, on 19/05/2021, it had dipped to 169.15.
- Eight days after that, on 27/05/2021, it had risen again to 179.06
If you were to look at a graph of the stock’s progress, this time between 07/05/2021 and 27/05/2021 would appear as a sharp downtick. This is the aforementioned “dip.” So when we say that we want to “buy the dip,” we mean that we want to buy the stock or Bitcoin at a point where the price has sharply fallen. Then, we can sell them again a few days later when the price has gone back up. The whole point of buying the dip is to set your portfolio up for long-term success.
How Risky is it to Buy the Dip?
I’m not going to lie. Buying the dip can be a risky strategy. If the coin you choose to buy continues to drop after buying it, you will lose money. Also, buying and selling in a shorter period can incur more fees than if you invest over a longer period.
However, this doesn’t mean it’s not worth it. If you can pull off a successful buy, then you will stand to gain some great profits. Buying the dip is most effective when you trade in hot sectors. If you happen to be around for a bull market – a time when market prices are often on the rise – then buying the dip can be the ideal strategy.
What matters the most is your dedication and research. Buying the dip requires a lot of planning and hypotheticals. Unfortunately, the stock or crypto market cannot be predicted perfectly. You can, however, make some good, educated guesses with the help of a finance coach. Top finance coaches can better predict where the market is headed, so you’re more likely to find a dip when you look through their eyes.
How to Buy the Dip
If you want to try your hand at buying the dip, these steps will give you a good starting point:
1. Look for Trends
You can’t possibly buy a dip without knowing if one is coming. Study all the data you can find on a stock or cryptocurrency and see if you can identify any particular trends in their prices. If something looks fairly strong, like it will bounce back from a drop, this may be your target. For instance, Johnson & Johnson was able to quickly recover from the COVID-19 downturn.
2. Follow Mean Reversion
Mean reversion is how a price fluctuates near its average price. You’ll find that prices fall or rise above their average price, but don’t move in straight lines. In case of a dip, you may invest, hoping the price returns to above or at its average. The idea here is to buy low and sell above the mean or average price.
3. Build Your Plan
After you lock a target, you want to put together a plan of how you’re going to buy. You definitely should not just buy randomly. Decide how much you’re going to buy ahead of time. Determine how long you will wait until you start looking to sell. If there is time, can you buy more? Do you know when you’re going to duck out? Try to plan all these things.
Managing Risks while Buying the Dip
So with this all in mind, I wouldn’t blame you for wanting to try your hand at buying the dip. It’s a good strategy, though very risky. So here are a few of my best suggestions for managing your risks when buying the dip:
- Have a Stop-limit – Set yourself a price at which you will not risk any further investment. This works both in the lowest part of the dip and the highest. Remember: just because a stock is on the rise doesn’t mean it will stay on the rise.
- Accept Small Gains – If your stock has risen a little and then petered out for a period, it may be time to accept that you’re only getting a small profit from it. It can be tempting to wait it out a little longer. Maybe it will go up again, but if you have to ask that, it’s probably better to step back and take what you got.
- Get Out Fast – If you do happen to wait a little too long and the prices start to drop, get out. There’s nothing wrong with taking a little loss, especially if you have already gained. If things look like they’re tanking, get out fast, and you could save yourself a much bigger loss.
- Keep Yourself Up To Date – Knowledge is power, after all. If you stop paying attention, the winds could shift, and you’d be stranded. So long as you keep your eyes on the prize during the dips, you should be able to gauge better where your money is headed.
So, there you have it. With these pointers in mind, you can get in on the dip. Just make sure you can get out again, and don’t let the market get the drop on you.