Looking to learn how to dip buy stocks? This is a very popular trading strategy where you wait until a stock falls down to a support level and look for a candlestick reversal for entry. Many of times this happens either at the base of a downtrend or near moving average lines. Keep an eye out for reversal candles such as hammers, and doji’s off of moving average lines. Ideally, you want to gain entries on small candles near support levels to keep your risk levels smaller. The bigger the candle entry, the bigger the risk.
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How to Dip Buy Stocks
Do you know when you should buy high and sell higher? There are times…but they are rare. Buying low and selling high is the name of the game, and dip buying is one of the best strategies out there. This strategy allows you to get better entries on stocks before they reverse in price. Ultimately, knowing how to dip buy stocks will make you a better trader. The stock market is a battle of buyers and sellers. As a result, what goes up must come down and vice versa. Timing the an entry on a stock chart is challenging, even for the best technical traders. That is why this strategy is so important to implement right.
A dip buy is, in essence, buying a stock after price has declined, but still an an overall up trend. There’s a saying that’s used often in the trading world, “buy the dip and sell the rip”. There are many different trading techniques out there. As a result, look for a stock trading service that explores and sheds light on a multitude of strategies.
Typically the best entries occur once a stock has taken off, and it pulls back as bulls take profit. New, and patient bulls lay in wait to jump in when the timing is right.
Day traders are hunters of volatility. When a low float stock is ripping, it can be tempting to get in on the action. No one wants to miss out on a move that shoots up.
However, chasing a move is a great way to end up with a loss. Hence the need for patience. The market trades in cycles. It would go to show that stocks to the same as well.
Many times those cycles occur much more quickly than the market because of profit taking. If you’re a day trader, you’re taking your profits within the same day. Hence the ability to have patience and wait for the dip buy.
Dip Buy Strategy
The dip buy strategy is one that’s typically used in day trading. However, it’s a strategy that can also be adopted for swing trading and options trading.
As a result, knowing how to dip buy stocks can be a great strategy to know. What is the goal of any trader? To make a profit right? The best way to do that is to get good entries.
In fact, buying the dip is something that can allow you to add to a position you’re already in. It is all about taking advantage of the price swings within a stock.
When you purchase shares after they decline in a strong up trend, you’re essentially getting in at a discount. Hence the importance of waiting for the proper time to make your move.
It’s tempting to see a stock ripping and want to get in on that move. In fact, learning how to control your emotions and be patient is most of the battle when it comes to learning stock trading.
The emotional aspect is a side many stock market trading companies don’t deal with. However, that’s usually the difference between profit and loss.
Why Buy the Dip?
Dip buying became a popular strategy because of the psychology behind it. Traders and investors know that everything trades in cycles; whether it happens right away or takes time.
As a result, the theory is that what you bought is going to recover back to pre-drop levels. However, there could be potential setbacks to keep that from occurring.
Remember that trading is emotional and news moves markets. As a result, not every dip buy ends up going back up. Sometimes price continues to fall.
That’s the risk we take as traders. Many times however, dip buying works in our favor.
Does Buying the Dip Work?
- Buying the dip works best in an uptrend
- When traders take profit, the price dips
- When price dips, this is a better buy on a rising stock
- In a down market, finding the dip is much harder
- It’s harder because price continues to fall and the dip turns out to be a fakeout
- Buying the dip in a down market is better for long term investors
- However, they have to be ok with possibly watching price continue to fall after buying
Trade the Candlesticks
You want to be able to confirm that dip buying is the right move when you go to purchase the stock. Hence the need to know what the charts are telling you.
That tug of war between the bulls and the bears is what forms the candlesticks. They’re the foundation of trading. Not only do they provide support and resistance but also show traders emotion.
Emotion has been a driving force in trading for quite some time. In fact, 17th century rice trader Homma realized that emotion affect price. As a result, he wanted to develop a way to compare the actual value of rice compared with emotion.
The candlestick system was born and it’s one we use to this day. The candlestick alone tells a story. Group them together and you get patterns. Those patterns and candlesticks can confirm potential dip buying moves.
Using technical analysis is another tool at your disposal for confirmation. While not there isn’t a crystal ball that’s going to tell you for certain what a stock will do, these indicators help.
They do work best when paired with candlesticks. Again candlesticks are the foundation of trading. Technical analysis is icing on the cake.
Moving averages, VWAP, RSI and MACD can be very helpful in getting confirmation of a move. It’s important to remember that indicators are lagging indicators. Hence the need for patterns.
However, when you use them in tandem, you get a clear picture. There is such a thing as having too many indicators. You don’t want to bog down your charts and make move confirmations confusing.
Practice the Dip Buy
We can’t stress enough how important it is to practice trading no matter what strategy you use. In fact, TD Ameritrade’s ThinkorSwim platform has a fantastic simulated trading account.
The beauty of being able to practice is not only protecting yourself as a new trader but working out the kinks. Have we mentioned yet that trading is emotional?
When you’re practicing, you’re not letting those emotions blow up your actual trading account. Instead you’re learning how to not only control your emotions but also spot patterns and potential plays.
We recommend placing hundreds of practice trades before going live. When you’re patient and willing to put in the practice, you’re going to be much more successful when you’re doing it for real. Take our ThinkorSwim tutorial to learn how to set up your own practice account.
The ability to dip buy gives you, the trader, a better position on stocks that will continue to move higher. Getting in before it takes off again means you avoid chasing and better protect yourself; which should be the goal of every trader.
If you need more help, take our swing trading course.