Forex Trading

What Is “Buy the Dip” in Investing?

what is buy the dip

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. 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 cheaper than before doesn’t necessarily mean the asset represents good value. There are also limitations and market periods where buying the dip won’t be an effective strategy.

First, it’s a type of marketing timing, and academic research in finance has proved that trying to time the market accurately is virtually impossible. Attempts to predict a decline, let alone a decline’s magnitude, is very difficult. Investors are always looking for the perfect strategy to beat the market. This theory has given rise to the “buy the dip” strategy. A trader who believes that falling prices don’t accurately reflect future sales may buy the dip.

Dollar-cost averaging (DCA) and buying the dip are both investing strategies that stock market investors can use to potentially reduce their average cost per share. In the absence of a bull market, investors may buy the dip if they anticipate an upturn and are willing to wait for a future increase in the stock price. In either case, investors are reacting to short-term price movements, which is a very different approach to investing for the long term.

Unless you need the additional monthly cash flow, the last thing you’d want to do is cease contributions during a down period. Looking for dips like those can provide an opportunity to buy into large corporations at their lowest prices in years. Taking a look at sectors with the largest share price declines, then analyzing the mutual funds or exchange-traded funds that track that sector, could shed light on a few opportunities to buy the dip. To be clear, no one knows when the bottom hits, and trying to time the market is never a good idea. That being said, there are plenty of opportunities to invest in stocks during down periods if you’re ready to invest for the long term — and you know where to look. Investors who follow a buy-the-dip strategy purchase stocks only under certain conditions, keeping cash in reserve to make purchases when the stock market retreats.

When to Buy the Dip

Situations where a trader might use this tactic are trend lines, fundamentals trading, random walk and emotional trading. Some critics dismiss buying the dip as a form of market timing. Once the price starts making lower lows, the price has entered a downtrend.

  1. Situations where a trader might use this tactic are trend lines, fundamentals trading, random walk and emotional trading.
  2. Managing risk is an important part of the buy-the-dip approach.
  3. 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.
  4. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions.
  5. For example, you could be required to put down a 10% margin on a $100 trade, which would mean paying $10 to open a $100 position.

In other words, investors who try to buy the dip are trying to time the market as a way to beat the market. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on, top-rated podcasts, and non-profit The Motley Fool Foundation. Our partners cannot pay us to guarantee favorable reviews of their products or services. This is for informational purposes only as StocksToTrade is not registered as a securities broker-dealer or an investment adviser. When it comes to a strategy like buying the dip, preparation is key.

Buy The Dips

However, a stock that’s experienced an unusually large drop in price may have experienced a shift in its underlying fundamentals. “Buying the dip” is another way to say purchasing a stock or an index after it’s fallen in value. As the stock’s price “dips,” it may present an opportunity to pick up shares at a discount and enhance your future gains if and when the stock rebounds to its previous high (or more). NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice.

NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance. But an investor who sets a high threshold for the dip—say, 40% to 50%—may run into trouble in a bull market.

what is buy the dip

Either one could determine a breakout or a downtrend. 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.

One of the most popular assets to trade during a dip are shares. You’ll go long (buy) when the price has dropped sufficiently to get it at a lower price than is usual, then aim to sell to close your position after the stock’s price has risen, to make a profit. Buying the dip, one of many approaches to investing, is when a trader or investor buys a security, usually a stock, that has just fallen in price on the belief that it will soon recover its value. It is a tactic employed for many reasons, but it has its risks.

Is buying the dip a good strategy for long-term investors?

Professional traders generally don’t trade like this. They wait for the right setups, and then they pounce. They jump in and out of all kinds of trades instead of waiting for one or two great setups. Newbie traders often make the mistake of believing that any dip means a stock is sure to skyrocket. Examples of these would include announcements like central bank updates from the Federal Reserve’s latest meeting, central bank stimulus or events like non-farm payrolls and earnings season. It could also be during macroeconomic headwinds like inflation, recession or bear markets.

Tips for Investing

But in general, after a pullback, the market will bounce back to a new high. 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.

If you’re considering this strategy with your investment portfolio, here’s how to get started. You can build a DCA investing strategy with Acorns by setting or boosting your Recurring Investment. Some of you may have heard the phrase “buy the dips” at some point in your personal or working life, or somewhere in your investment education. The phrase “buy the dip” has gained popularity through memes — particularly in the context of volatile cryptocurrencies such as Bitcoin and meme stocks such as GameStop. Price action helps determine a stock’s direction and momentum.

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IG International Limited receives services from other members of the IG Group including IG Markets Limited. Discover why so many clients choose us, and what makes us a world-leading provider of CFDs. Discover the range of markets and learn how they work – with IG Academy’s online course. Ben Luthi is a freelance writer who specializes in a number of personal finance topics, including investing, saving, budgeting, consumer credit, travel, credit and more.

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