Watch our video on how to use the buy the dip strategy and read our blog for lots of recent examples where dip buying has paid off bigly.
What Does Buy the Dip Mean & How to Do It?
- Buy the dip means to buy stocks at support, or oversold
- There are several ways on how to do it
- Look for heavily oversold stocks that are in an uptrend
- Watch for reversal candlesticks such as doji's and hammers
- Keep an eye on potential bounces off moving average lines or support levels
- Once a reversal candle happens at these levels consider taking a long position
- Enter long position once price crosses over top of the reversal candle
- Use a candlestick close below the reversal candle as stop
- Have exit strategy (sell target) in place before entering position.
- Do not dip buy unless you know candlestick patterns and how to trade
There's a saying in the industry that says buy the dip and sell the rip. Dip buying is an incredibly popular trading strategy. Especially in 2019! Have you seen the market making ATHs this year? The video above gives you an overview on how to dip buy stocks.
Learning how to buy the dip sell the rip and knowing how to dip buy stocks isn't as hard as many traders might think. But there is a trick to dip buying the right way. Read below and we'll fill you in.
1. Buy the Dip Sell the RIP
So, the saying goes buy the dip sell the rip. Yes, this is a popular saying among many traders. The concept is as simple as the saying. “Buy the dip” essentially means to buy at support levels and sell the rip means to sell at resistance levels. Easy right?
The good ole battle between the bulls and the bears. Bulls push to create momentum to the upside and the stock goes up. The bears try to bear it back down, thus creating trade-able support and resistance levels. It’s a battle, and one that you should pay attention to so you can profit from it.
When price is bullish and the trend is up, you're looking for pull backs or dips off support. Find those bullish candlestick setups. You need to be able to recognize the right candles to identify the bull run and also when candles begin to reverse.
2. The Trend Is Your Friend When You Buy the Dip
So now you have a general idea on how to dip buy stocks. Buying the dip just means buying at support levels, within an overall uptrend. You need to make sure that the overall trend is up, or buying the dip may be riskier, or pointless (it ain't done dipping yet jack!)
The daily and weekly charts might be in strong uptrends, as with a stock like NVDA currently. When NVDA pulls back to support and dips, bulls rush in to buy the dip and move the stock higher.
Whether it's on an intraday, daily, weekly, or monthly chart, you need to pick your dip buy strategy and apply it dependent to your time frame. We have highlighted dip levels below of $AAPL using an hourly chart (my favorite time to dip buy on swing trades).The 9EMA daily was bought up by the bulls and the bears retreated to hibernate (until the next battle).
Traders are creatures of habit who look at patterns, price action and other criteria for trading signals. Why patterns? Because patterns are repeated time and time again by other traders and algorithmic computers.
Candlesticks are formed by the battle between the bulls vs the bears and this battle leaves clues which are discernible as patterns. Most traders spend some time studying these! Some of the most popular patterns are the cup and handle pattern, Bull Flags, Pennants, and Double Bottoms.
Alright let’s probe down a bit deeper into dip buying stocks and support and resistance.
What Is Price Dipping?
- Price dipping can happen several different ways. In an overall uptrend, price can pull back to support levels or moving average lines then the traders who have been waiting..watching...will buy the dip. Price can sometimes sell drastically when a stock sells off after becoming over extended or hitting a huge resistance level. The most common price dipping scenario is when price action has small pullbacks in an overall uptrend.
If you want to effectively learn how to dip buy then learning technical analysis is going to be your best shot at doing it properly. Learning how to read stock charts will be critical to your success on any type of trading style.
1. Dip Buy on Different Time Frames
There are many different ways to skin a cat. Day traders sometimes like dip buying stocks on intraday time frames using 5 min and 1 min charts.
Swing traders like to use map out trend lines and find support levels on daily charts. Long term traders like to watch weekly and monthly charts and add some fundamental analysis to be successful.
Is there a REASON to buy the dip? There should be. Run your stock through StockRover and grab a fresh research report before you buy it.
By now, you are understanding...that 9EMA keeps popping up. This particular moving average line appears to be a good indicator for dip buying.
So, if you want a very helpful tip to remember, look for a stock that's selling off and watch for the bulls to come back in. Then look for your entry as close to the 9 exponential moving average as possible.
Should You Buy More Stocks When They Are Down?
- You should only buy more stocks when they are down once you have signal confirmation. This is why knowing candlestick patterns is key. Don't catch a falling knife when a stock is drastically falling. Wait for candlestick reversal confirmation before you consider taking a long entry. How else are you going to manage risk? Buy and hope is not a good strategy man...
Have you ever heard the term pullbacks thrown around? Traders use this term often. This happens when a stock moves up and then gravitates back to moving average lines (support). This is essentially the same thing as a dip buy.
Risk is lower if you are entering a trade closer to support. As price slowly moves up or goes parabolic on a stock, it naturally wants to pullback or crash right back down to the moving average lines. Practice learning these stock behaviors in a trading simulator before going live!
1. Moving Average Lines
These moving average lines are the entry areas that other traders will look at to reenter the stock on a dip, if they see potential continuation upwards. Some popular moving average lines are the 9 ema, 20 ema, and the 50 and 200 sma's.
A very popular indicator that many day traders pay attention to is vwap. The vwap trading indicator is basically the average price of a stock trading intraday.
Many of times stocks will move up intraday and then drop down to VWAP where traders will often buy the dip for potential bounce and continuation upwards. Check out $SRNE for example:
The gap and go strategy and red green trading are other popular day trading strategies as well; which is also a good precursor that leads into a buy the dip sell the rip trading strategy.
Take a peek at them when you get a chance! Also, check out the list of stock market books that we recommend.
2. Ride the 9 After You Buy the Dip
So you bought the dip. Now what? If you buy near the 9 ema then a safe potential stop loss level would be the first candlestick close below the 9 ema.
It's important look at other time frames and technical indicators as well to confirm your trade. If you're confused, don't worry. We teach you live, every day, every week. Check out our trading service to learn more.
A candle close below the 9 ema shows potential weakness or loss of momentum. So, caution is needed. “Ride the 9” is a very popular trading strategy that we have taught others in our coaching sessions and trade-room.
Then buy the first candle to break above that previous candle close price using either that candle or the 1st candle close below the 9 ema as a stop.
Let’s look at the potstock ACB below. The 9EMA is blue. ACB broke consolidation and dipped below the 9. then it ripped for over 20 minutes before the first candle closed below the 9 triggering a sell off:
Note where the 9 bullishly crossed the 20 ema in the highlighted area. Also, you can see that the 9 ema has been a strong area of support and provided traders and investors with a nice opportunity to “ride the 9”.
This provides a good opportunity to buy the dip sell the rip. You can sell for profit when prices gets overextended above the 9 ema then look for reentry around the 9 ema as well. All depends on your risk tolerance. Take our free online trading courses.
3. Rules To Follow When You Buy the Dip
Just a reminder that everyone's risk management and tolerance is different. There isn't a rule of thumb for what price to use as your stop loss with buying stocks, but always pre-defining your entries and exits is critical on every trade.
Traders always seek to limit risk. The longer you are in a trade, the more risk you are taking. The simple fact is that anything can happen, and having rules to trade by help a ton to prevent unnecessary risks. Take our penny stock trading course to understand how to trade these types of stocks.
Also, always remember to take your profits! You can always find more trades to make in the market. The opportunities are endless, especially if you have a great scanner like Trade Ideas. Market Club is another great scanner for swing traders as well. Check out our Market Club Review.
The best way to learn how to dip buy stocks is practice. It's important to find the trading strategy that fits your personality. Lastly, and please remember...buy at support and sell at resistance or buy the dip and sell the rip!