2 reasons why when you buy the dip, it keeps dipping:
- Short Sellers – Shorting a stock should be seen as nothing more than a non-biased trade and not something emotional. However many retail traders tend to think that “shortist should burn in H*** etc.” In actual fact, short sellers do add to the buying pressure as most will eventually cover their short positions (buy back in). For the most part, we often see short sellers come in when stocks are at thier 52 week high as this tends to be an area where most investors would take profits. Very much like how momentum drives the stock price up, that very same momentum can drive the stock price down as more short sellers join the “rallly”.
- Margin Calls – Unfortunately when traders who trade on margin reach the point of having insuffucient funds to meet the respective broker’s minium required amount, brokerages would demand that investors either close their existing positions or to top up more cash. This adds to even more selling pressure in the market and more often that not is what fuels an even stronger rally to the downside.
From here, the big question that most people will ask is, “At what point does it stop dipping?” Unfortunately, there is no crystal ball that will tell us exactly when the selling would stop but there are technical indicators that investors can use to guide their trades.
For the rest of this article, I will be sharing 3 factors that I look out for to increase my chances of landing a “good” dip!
3 factors to decide if now is a good time to accumulate “the dip”
1. Psychological Support / Resistance
I find this to be one of the most useful tricks in the book which requires almost no advanced chart analysis skills at all. While its effectiveness is questionable at best, there is no doubt in the minds of both bulls and bears alike that such points are indeed areas where decisive trades are made.
Let’s take Google for example. In the chart below, we see Google surged early this week on the back of strong earnings. However if we look at the chart, we can see clearly that this is the third time where investors are taking profit just as the price hits $3000. Is this a mere coincidence or is this indeed a psychological area where investors make their move?
The same can be said when investors chose to buy back in at $2500 where the price action briefly touched $2490 before rotating to the upside. While investors shouldn’t be trading solely on psychological price points alone, it does provide some form of guidance as to where the selling might stop.
Another example where I’ve found the instrument to be highly responsive to psychological Support / Resistance levels is Bitcoin. Looking at the chart below, we see buyers coming in to swoop up Bitcoin just as it touches the price of $30,000. Likewise, we see profit-taking coming in almost instantly as bitcoin hit $69,000. Its hard to say if such resistance/support levels will always remain but what’s certain is that I do have a queue order to buy Bitcoin at $29,999!
2. Opportunities in times of FEAR
This saying is probably as old as the man himself, most of us would have surely heard this at least once in our lives.
But here’s the thing, how do we measure fear and greed? Such factors are qualitative/emotional in nature and can’t possibly be plotted on a chart or graph. Well here the thing, there actually is such a thing as a CNN FEAR & GREED INDEX.
At present we are at 35/100 which indicates that by and large, fear is still driving the market. In all honesty, circumstances would be bad if this index hit 0/100 as that would most likely mean a repeat of the Covid Crash in 2020 or even worst the 2018 economic recession.
While investors shouldn’t be relying solely on this index, I must admit that it has indeed proven useful in providing a non-biased point of view of what’s driving markets. In general, times of fear may not necessarily indicate that market is crashing however it would indicate that in general, stocks are falling more than they are rising and therefore, we should be on the lookout for buying opportunities.
Likewise, in times of greed, investors shouldn’t look at wiping their slate clean but rather to identify key profit-taking zones.
3. Using Limit Orders
With the rise of mobile trading apps, ease of trading seems to be one of the top priorities for the modern-day investor. With that, traders often use marker orders to execute trades as it allows for that instantaneous trade to be completed.
For those new to these terms, a market is order is when you buy or sell the instrument immediately. This type of order usually almost ends up with 100% certainty in terms of execution however there may be a slight variation in the price that you see on screen and the actual price which you were able to secure the instrument. The only time a market order failed on me was during the GME saga and that was mostly attributed to surges in trading volume.
Limit orders are a little easier to understand – you set the price at which you want to purchase the instrument at. Though this does not guarantee that the order is executed, it has allowed me to accumulate dips more rationally. Here is why most of my trades are made with limit orders (with exception to GME back then)
- Limit orders are usually planned ahead of time when the investor is not acting in the heat of the moment. This allows for a more clear-headed and rationalised trade to be made rather than one which is not well thought through.
- A matter of habit – I’ve found that engaging in limit orders has most certainly give me more time to plan my trades. This has allowed me to be a little more calm in my decision making and more often that not has allowed me to get dips at even lower prices!
When you buy the dip but it keeps dipping…is it a scam?
Is it always a good idea to buy the dip?
If you bought the dip each time it happened over a 5 year period and most importantly, HELD on to it, you would have been seating on a good profit. However, the issue comes when traders may not be able to hold their positions over a 5 year period. Furthermore, the assumption, in this case, is that the rally continues which based on current circumstances is highly uncertain.
Buying the dip has been successful and can often be to an investor’s advantage. But as always there are no guarantees. What’s more certain is to focus on income growth more than anything else to ensure that the dip-buying can go on!
