SHOULD YOU BUY THE DIP?
What does ‘Buy the Dip’ mean?
"Buy the dips" means purchasing an?asset?after it has dropped in price. The belief here is that the new lower price represents a bargain as the "dip" is only a short-term blip and the asset, with time, is likely to bounce back and increase in value.
Understanding Buy the Dips
"Buy the dips" is a common phrase used by investors and traders after an asset has declined in price in the short term. After an asset's price drops 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 drop, they are buying at a lower price, hoping to profit if the market?rebounds.
Buying the dips has several contexts and different odds of working out profitably, depending on the situation. Some?traders?say they are "buying the dips" if an asset drops within an otherwise long-term?uptrend. They hope the uptrend will resume after the drop.
Others use the phrase when no secular uptrend is present, but they believe an uptrend may occur in the future. Therefore, they are buying when the price drops in order to profit from some potential future price rise.
Limitations of Buy the Dips
Like all?trading strategies, buying the dips does not guarantee profits. An asset can drop for many reasons, including changes to its underlying value. Just because the price is lower than before doesn't necessarily mean the asset represents good value.
The problem is that the average investor has very little ability to distinguish between a temporary drop in price and a warning signal that prices are about to go much lower.
Managing Risk 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 establish a price for controlling their risk.?
Once the price starts making lower lows, the price has entered a?downtrend. The price will get cheaper and cheaper as each dip is followed by lower prices. Most traders don't want to hold onto a losing asset and avoid buying the dips during a downtrend. Buying dips in downtrends, however, may be suitable for some long-term investors who see?value in the low prices.
KEY TAKEAWAYS