If you’re new to the trading game, you’ve probably come across the term, ‘buy the dip.’ So what exactly does that mean?
Dip buying is a strategy you NEED to know. Many traders use it all the time — especially in day trading. It’s one of the most important concepts for every trader to grasp, no matter what kind of trading you do. It can be useful in day trades, swing trades, position trades…
I talk about dip buying almost every trading day during my Pre-Market Prep livestream on Instagram at 8:30 a.m. Eastern. (Sign up to get daily updates on these sessions here.)
So how do you buy the dip? When should you do it?
Let’s break it down…
Table of Contents
- 1 What Does It Mean to Buy the Dip?
- 2 Risks of Buying the Dip
- 3 How to Buy the Dip: 5 Steps for Dip Buying
- 4 Tips for Trading With a Dip-Buying Strategy
- 5 Indicators to Look at When Buying the Dip
- 6 When to Buy the Dip
- 7 How Do You Use the Dip Buy Strategy Wisely?
- 8 Stocks to Buy on the Dip
- 9 Should You Buy the Dip?
- 10 Conclusion
What Does It Mean to Buy the Dip?
To understand what it means to buy the dip, you need to understand what a dip is … It’s when an upward trending stock dips in price, and it can be an ideal time to buy.
That’s what the dip-buying strategy is all about. Traders wait for the right opportunity to buy in order to maximize their return. Or in more simple terms, buy low and sell high.
A smart trader will act like a sniper, waiting for the right setup and window of opportunity.
Every trader approaches things from a different angle. You need to have your risk/reward ratio figured out. There’s always the chance that the stock isn’t actually about to dip and rip (one of my all-time favorite patterns) but instead is in a downtrend and tanking.
That’s why you should set your limits and use limit orders when executing a dip buy. Do your research and planning your limit order can help you determine your risk.
Risks of Buying the Dip
Buying the dip can be risky. You’ve got to know what you’re doing.
Newbie traders often make the mistake of believing that any dip means a stock is sure to skyrocket. They’re wrong.
When you’re looking to buy the dip, a price rise isn’t guaranteed — nothing in trading is guaranteed.
A dip buy could go wrong in many ways. A stock could always tank, so you need to know when to cut your losses and get out…
That’s why it’s important to have a stop limit to help you limit your risk.
And if the stock doesn’t spike as high as you expect, that’s OK. Take small gains. And if the trade goes south, get out fast. Remember, sometimes a small loss is a big win if it means you stuck to your plans…
How to Buy the Dip: 5 Steps for Dip Buying
Look for the Trend
Before you dip buy, you need to determine the stock’s trend. Sure, it could have been going up for an hour, but how is it trending that day? What about that week or that month? Where’s it headed overall?
This is where you need to study — the charts and the patterns. That could help save you from buying a stock headed for a tailspin rather than a dip.
Use Your Indicators
Indicators can be helpful when trying to determine if a stock is a good dip-buy candidate.
Volume, price action, price trend, momentum … you need to find which indicators work for you. They can help you determine when it’s the right time to strike. Not sure which indicators to use? Check out this guide to technical analysis.
The StocksToTrade platform has every indicator you can think of and more. Designed by traders for traders, our platform can help you find the best trading opportunities that fit your trading plan.
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Have a Plan
Before executing your dip buy, have your trading plan ready.
A trading plan is necessary for every smart trader. You can’t go in blind, make random trades, and expect to see positive results.
You should have a plan with an entry strategy, an exit strategy, limits, risk, and more.
Take notes, study, and build the perfect trading plan that fits your account and trading goals. All traders are unique — and so are their trading plans. Personally, the dip and rip pattern is one of my favorites.
Checklist
A checklist can help you determine whether a stock’s a possible dip buy. This could help indicate whether a stock’s dipping or in a downward trend.
Is a stock in a hot sector? Is there news or a catalyst? Has this stock come up in chat rooms?
These are all important considerations when trading in general, but they’re especially important when determining whether it’s the right time to buy the dip.
Create your checklist and try to include as many indicators as possible.
Study
Following these steps could help you spot an opportunity to buy the dip. But none one of them will be useful unless you’re actually able to recognize when a stock is poised for a dip buy.
There’s only one way to get there — homework.
Study the patterns. Learn from your mistakes. Review your past trades and keep a journal. Look out for opportunities. That’s the life of a trader.
If you want to be able to recognize a good opportunity to buy the dip, learn from the past…
Tips for Trading With a Dip-Buying Strategy
Start Small
When learning any new trading strategy, you have to walk before you run.
Consider starting with smaller positions the first few times you try to buy the dip.
So many newer traders buy what they think is a dip but turns out to be a downward trend. These traders can lose big. So start small. Remember, you can learn the same lessons trading with $100 as you can trading with $1,000.
It’s all about becoming a smarter trader.
When you improve your skills, build confidence, and develop consistency, then think about scaling up into bigger positions.
Wait for Your Ideal Setup
You may think you see dip buys everywhere…
Newer traders tend to have quick trigger fingers. They jump in and out of all kinds of trades instead of waiting for one or two great setups.
It’s just FOMO trading, and it tends to end in a bunch of losses.
Professional traders generally don’t trade like this. They wait for the right setups, and then they pounce. Patience is key in trading.
Wait for the setup that works for you and fits your trading strategy. Go through your checklist. Word toward developing patience and wait for confirmation before you buy the dip.
Set Your Limits
Part of a trading plan should be having limits. Prepare for all possible scenarios in your trading plan — nothing should take you by surprise. If it does, be prepared to cut losses.
Sometimes that great dip buy never bounces back.
That’s OK — it happens. Things change. The market’s a cyclical, wild place, and that’s why traders like me love it! Be ready for that and have a cap on how much you’re willing to lose in every trade you enter.
Losing is part of the game. It’s part of learning. Consider using stop-loss orders to limit your risk and trade small to save yourself from getting wiped out in a single trade.
Indicators to Look at When Buying the Dip
Volume
Volume is one of the most important indicators to watch when considering a dip buy. It’s usually one of the first indicators day traders look at when evaluating potential trades.
Volume could determine how much momentum a stock has and how volatile it will be in a trading day. It’s also important for swing trades and position trades.
If you want to make solid trades, look for a stock that has the momentum to break out of ranges. No momentum is not good for your risk/reward ratio.
Trading volume could help determine if a stock’s trend is real and help you see when to buy the dip.
Price Action
Price action helps determine a stock’s direction and momentum.
Once a stock’s trend is established, it’s often likely to continue. So keeping an eye on the price action could help you determine a good dip buy opportunity.
If you notice a stock’s staying within a certain price range and seems like it might break out, it could be a potential dip buy if it dips at some point during a trading day.
Trade with the trend and follow the price action. It’s how you can trade smarter. If you don’t pay attention to the price action, you could increase your risk.
Support and Resistance Levels
When looking for a dip buy, support and resistance levels are crucial. Either one could determine a breakout or a downtrend.
When a stock consolidates, it sets new support and resistance levels … Shorts and longs fight it out to determine the stock’s trend.
Support and resistance are important to recognize when planning trades … And when stocks break out of these areas, whether up or down, they often set new levels for potential positions.
It’s also important to know support and resistance areas when setting stop losses.
When to Buy the Dip
Once you identify a potential dip buy, be patient and wait for the right moment to enter the trade. Don’t panic on a small move. Keep an eye on the indicators I talked about above. They’ll help you determine when to buy the dip.
Every trade is different. Things can change in an instant, especially in today’s markets — that’s why you prepare your trading plan and study the patterns.
How Do You Use the Dip Buy Strategy Wisely?
It’s hard to find potential dip buys if you don’t have the proper tools. When I’m building my watchlist, I refer to my checklist. I don’t want to chase or anticipate price movements in any stocks. I want to react to what the market’s giving me.
I use StocksToTrade to help with all this. It’s got tools, scans, and screeners that help me find stocks that fit my strategy. Check it with a two-week trial that includes the game-changing Breaking News Chat — where two market pros alert you to potentially market-moving news — for just $17.
Stocks to Buy on the Dip
I use StocksToTrade to find stocks that potentially fit into a dip-buying strategy. I always start my day off by looking for big percent gainers. These stocks usually have big volume, a lot of momentum, and great price action — some of the indicators you want to look out for in dip buying.
Should You Buy the Dip?
That depends. Ideally, traders want to buy a stock when it’s trading at the lower end of its price range … but there’s more to it than that.
Make sure you can recognize a good dip buy before entering a trade. You don’t want to buy what you think is a dip, then watch as the stock tanks.
The only way to avoid this is to study and practice. Every situation is different — so be prepared. Your trades won’t work for you unless you work for them.
Conclusion
Well, there you have it — the dip-buying strategy in a nutshell.
When it comes to a strategy like buying the dip, preparation is key. I’m big on getting up early to prepare. If you’re part of the SteadyTrade Team, you already know this.
The SteadyTrade Team is our great trading community where the pros get in the chat room and trade alongside you. You also get access to daily webinars, mentorship, and plenty of other resources … Join us today to take your trading to the next level.
What do you think about dip buying and the dip and rip pattern? Leave a comment with your favorite strategy to buy the dip below!