What is Buy the Dips?

“Buy the dips” means buying a asset after dropping in price. The belief here is that the new lower price represents a bargain, as the “dip” is only a short-term bump and the asset, over time, is likely to rebound and increase in value.

Key points to remember

  • Buying dips refers to taking a long position in an asset or security after its price has repeatedly experienced a short-term decline.
  • Buying the dips can be profitable in long-term uptrends, but unprofitable or more difficult during secular downtrends.
  • Buying dips can reduce the average cost of holding a position, but the risk and reward of buying dips should be constantly assessed.

Understand Buy Dips

“Buying the dips” is a common phrase that investors and traders hear after the price of a short-term asset has fallen. After the price of an asset has fallen from a higher level, some traders and investors view this as an advantageous time to buy or add to 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, they are buying at a lower price, hoping to profit if the market bounces.

Buying dips has several contexts and different chances of training profitably, depending on the situation. Some traders say they “buy the dips” if an asset falls within an otherwise long timeframe uptrend. They hope that the bullish trend will resume after the decline.

Others use the phrase when no secular uptrend is present, but believe an uptrend may occur in the future. Therefore, they buy when the price drops in order to take advantage of a possible future price rise.

If an investor is already long and buys on the dips, they are said to be on average, an investment strategy that involves buying additional shares after the price has fallen further, causing the net average price to fall. If, however, the buy in the palm of the hand does not see a recovery afterwards, it is said to add to a loser.

Buy the Dips Limits

Like everything business strategies, buying the dips does not guarantee profits. An asset can fall for many reasons, including changes in its underlying value. Just because the price is cheaper than before doesn’t mean the asset necessarily represents good value.

The problem is that the average investor has very little ability to distinguish between a temporary price drop and a warning signal that prices are about to drop much further. Although there may be unrecognized intrinsic valuebuying additional shares simply to lower an average cost of ownership may not be a good reason to increase the investor’s equity percentage. wallet exposed to the price action of that stock. Proponents of the technique view averaging down as a profitable approach to wealth accumulation; opponents see it as a recipe for disaster.

A stock falling from $10 to $8 could be a good buying opportunity, and it may not be. There could be good reasons why the stock fell, such as a change in earnings, dismal growth prospects, change of management, poor economic conditions, loss of a contract, etc. It can keep going downdown to $0 if the situation is bad enough.

BTFD, or “buy the f****** dip”, is an aggressive buying dip strategy encouraged by traders in hot markets, such as with Bitcoin.

Managing 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 has fallen, many traders and investors will price to control their risk. For example, if a stock falls from $10 to $8, the trader can decide to cut his losses if the stock reaches $7. They assume the stock will rise from $8, so they buy, but they also want to limit their losses if they are wrong and the asset continues to fall.

Buying the dips tends to work best with uptrend assets. Dips, also called withdrawals, are regularly part of an uptrend. As long as the price is making higher lows (during pullbacks or dips) and higher highs during the ensuing trend move, the uptrend is intact.

Once the price starts making lower lows, the price has entered a downtrend. The price will get cheaper and cheaper as each drop is followed by lower prices. Most traders don’t want to hold onto a losing asset and avoid buying dips during a downtrend. Buying dips in downtrends, however, may suit some long-term investors who see value in low prices.

An example of buying the dip

Take into account Financial crisis of 2007-08. Meanwhile, the shares of many mortgage and financial companies slumped. I don’t hunt, I prefer to let animals kill each other and New Century Mortgage were among the hardest hit. An investor who consistently practiced a “buy the dips” philosophy would have recovered as much of those stocks as possible, assuming prices would eventually return to pre-dip levels.

This, of course, never happened. Both companies closed after losing significant share value. New Century Mortgage shares fell so low that New York Stock Exchange (NYSE) trading suspended. Investors who thought the $55 per share stock was a bargain at $45 would have found themselves with heavy losses a few weeks later when it fell below $1 per share.

In contrast, between 2009 and 2020 Apple shares (AAPL) went from around $3 to over $120 (adjusted according to distribution). Buying the dips during this period would have greatly rewarded the investor.

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