The key principle to making a profit in any trade is to buy low and sell high. No matter what your trade-in, you are to make a profit when you play your numbers right. When it comes to the stock markets, you will have to add timing into this mix. And you get the equation to turn up a profile in your stock trade. As you dig deeper into the money markets and get a hold of the terminologies, things start to make more sense. A very common catchphrase among traders and investors is ‘buying the dip’.
What is all this fuss about the ‘buying the dip’ strategy?
The stock markets are quite volatile and have phases of highs and lows. More often than never, a stock can go up for a while and then suddenly drop for a week or so. Only to bounce back to shoot up again. And the practice of buying an asset when its value has declined is called ‘buying the dip’. The basic idea here is to buy more units of the asset at a lower rate and earn a profit in the long run.
How is it different from the basic trading principles?
Now you may wonder, isn’t that the idea behind trading anyway? How is that different? Why have a fancy term for such a thing? Well, the idea is the same, but this concept is slightly different.
Whenever you trade at any given time, you consider that as your reference point. And invest, speculating that the prices would go up here on forward. And this can be irrespective of the fact whether the share market is bearish (dropping) or bullish (rising).
But for the ‘buying the dip’ to work, there are two reference points. The trader picks the first reference and compares it to the current price (second reference). And if the current price has dropped below the trader’s threshold, he might consider it a dip. At this point, he might decide to invest in the stock and buy more units at a discounted/lower rate.
Now, these references and thresholds may vary based on their trading strategies and the type of assets they invest in.
Why and when to use the BTD strategy?
One of the important things to note when playing with the BTD strategy is managing risk and doing research. The best candidates to use the ‘buying the dip’ strategy are the ones with a strong presence. An asset that has growth potential or has a history of good performance is a good place to start.
So it is important to do your research and understand the market trends. Also, weigh your risk capacity and risk mitigation strategies. Seasoned traders often hedge their positions/ risk by investing in an asset that offsets this investment, if there are losses.
Traders also use BTD for mean reversion and make small profits on price fluctuations.
Many stock trading app offers features like ‘what-if’ analysis that you can use to plan and test your BTD strategies.
On the footnote, like any other investment strategy, ‘buying the dip’ has its risks. So, before you make a big bet or risk too much, understand its intricacies and choose your investment wisely.