Buy on the Dip is a very old-style strategy that is frequently touted as “brand new” to new and beginning stock traders, novice swing traders, and new investors. The theory is you want to “buy low and sell high.” But more often than not, new traders and investors discover it is not as easy as it sounds. Does the buy on the dip strategy still work in the modern, fully automated stock market?
The answer is: it depends. Just because a stock or an index, such as the Dow 30 Industrial average, has a few down days, doesn’t mean it is time to buy on a dip. There is more to this strategy than just rushing to buy a stock that has been moving down for a few days.
You need to consider these factors if you wish to be successful buying on the dip:
1.What is the current market condition and where is the stock in its trend cycle?
Just because a stock moves down doesn’t mean it is ready to resume moving up right away.
2. Is this just a profit-taking after a strong run upward, OR is this the beginning of a major TOP for that stock or index? Only technical analysis can tell you the answer.
3. What is your intent for the trade? A stock that is moving down is doing so for a reason. Either it is over-speculated, or it is at a resistance level, or profit-taking is occurring from the professional side of the market, or the stock’s trend is exhausted.
4. Is this a short-term retracement or a correction? Again, technical analysis will tell you.
5.Have Dark Pools or pro traders been actively buying the stock at the price level you intend to use as the buy on the dip entry? You need leading indicators to tell you this information. Just looking at price or price indicators is not enough.Buying on the dip is a very old strategy. Yes, it can work but more often than not, new investors and beginning traders do not understand the risk factors and when it won’t work because the stock or the index has topped. Understanding the dynamics of market condition analysis and market participant cycles, including the activity of Dark Pools, HFTs and pro traders, help you make better decisions when using this strategy.
Go watch “5 Steps to Trading Success” webinar to learn entry candlestick signals, indicator analysis for tracking Dark Pools and Professional Traders, how to put on the trade, how to use trailing profit stops, and when to exit the trade and take your earned profits.
Martha Stokes CMT
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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