Buy the Dips – Concept, Risk Management, Performance, Bear Market Situation & more

One of the most exciting concept of Intraday Trading is to Buy the Dips.

The majority of the global indices in 2020 started with a bang because almost all participants were expecting continuity for the gains of the previous year.

But the entire world went for a toss in March 2020, with the ongoing novel coronavirus. Due to the pandemic majority of the indices dropped more than 20%.

Since May, almost all assets are rallying, and a few got back to square one with actual losses. Well, in this guide, you can learn about the buy dips strategy and how you can use it in a healthy market.

The debate around the buy dips strategy is in prominence mainly because there is the anticipation of the second wave of the deadly virus.

Know about Buy the Dips

Often buy the dips is a common phrase that traders hear every now and then. They hear this phrase pretty much when the price of the underlying asset or security declines.

There are a plethora of contexts available under the buy dips strategy. The odds of working out vary from situation to situation.

A few traders say that they hear a lot about buying the dips when an asset drops in a long term uptrend.

It is because people hope that the long trend will resume posting the drop.

People use this phrase when there no uptrend is present, but they believe they will see an uptrend in the future.

In simple terms, they tend to buy a security when the price drops so they can earn a profit when the price rises in the future.

Some traders and investors take it as a benefit when the price of an asset drops from a higher level. This is the ideal time to buy or add an extension to the current position.

Basis of Buy the Dips Strategy

Ideally, buy the dips strategy is mainly based on price waves theory. Investors tend to buy an underlying security at a low price when they buy an asset after the price drops.

These investors hope that they will make a profit when the market rebounds. Just like all other trading indicators, the buying dips strategy also doesn’t guarantee any profits.

For a plethora of reasons, an asset can drop, like changes to the value underlying. Just because the price is low as compared to the previous doesn’t mean that the stock is excellent for investment.

It can either be a more significant or worse opportunity to buy a stock when it dips down from Rs.500 to Rs.450.

The reason for the fall in price can be anything, including change in management, loss of contract, dismal growth prospects, poor economic conditions, etc.

It might drop continuously if the situation is terrible.

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How can Buy the Dips Strategy manages the Risk?

Almost all the trading strategies have some or other type of risk. The majority of the traders tend to establish a price for controlling the risk of the price when it comes to buying an asset after it falls.

For example, when the price of the security goes from Rs.500 to Rs.450, the traders choose to reduce their losses if the security touches Rs.400.

It is mainly because they assume that after reaching Rs.400, the price of the stock will rise, which is why they continue to buy.

It is perfect to buy the dips when the securities are in an uptrend. You can also call the dips as pullbacks as they are part and parcel of the frequent uptrend.

The uptrend is intact when the price is making higher lows and higher highs. The price enters the downtrend when it starts making lower moves.

When the dip follows low prices, then the price will get cheaper and cheaper.

The majority of the traders don’t wish to hold a losing asset, so they avoid buying dips when the trend prevailing is a downtrend.

If you are a long-term investor, then buying dips is ideal as you can see value in the low prices.

Can you Buy The Dips every day?

Most likely, if you are a long-term investor, then it is quite possible that you confide in the stock market’s future.

Be it rumblings of respected names in the market or past history of the stock market, the long-term investors always have their dollars at work.

The long term investors mainly understand that there is no gain in guessing when the stock market will hit the top or bottom.

Instead, they choose to wait for the long term and enhance their investments when the market dips down as it provides an opportunity to buy.

On the other hand, the short term investors and traders think the other way round. It is mainly because they don’t believe it when the market declines as they don’t think about the market much.

The only concern for the short term investors is to see if the market will decline or rally in some weeks or days. Just thinking of buying the dips strategy doesn’t always work.

You also need to have some trading signals.

Can you Buy the Dips when Market is Falling?

Instead of describing a particular situation that gives out for a specific falling of the market, we shall discuss about the rally post that.

All you need to do is assume that you cannot predict what lies in the future. Some of the preset conditions include:

• The bear market begins.
• A very short term crash begins.
• It is also a stagnant period for a plethora of investors.

When the market is falling, don’t borrow the money for investing purposes. It is advisable to use only cash available for investing.

To protect your portfolio from losses and to remain bullish, you must learn to use options.

Buying the Dips – Conclusion

You can protect your portfolio when the market is falling by using buying the dips strategy. It is an essential strategy that you must use for trading in the market.

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