Investors and traders often tell each other to "buy the dips" after an asset decline in price in the short term. Some investors and traders view a price drop of an asset from a high level as an opportunity to buy or add to an existing position. According to the theory of price waves, buying dips is a good idea. Purchasing an asset after a decline allows an investor to take advantage of the lower prices and profit if the market recovers.
How to use the Buy the Dip Strategy
- Firstly you need to stay on top of market trends, understand the financial market you wish you explore
- Look out for a financial asset(s) that show a definite upward trend.
- Watch out for when the upward trend ends, and the assets begin to decline sharply. This decline could be caused by several factors. For example, a strong voice’s position on the investment; remember Elon Musk’s tweet that caused the price of Crypto to fall? Also, report of a company’s bad quarter, natural disaster, death of a critical person connect t the asset, e.g., CEO, a crypto ban in a country.
- Generally, the market overreacts, which makes buying the dip plan optimal.
- It is crucial to understand how deep the dip will be using the dollar-cost averaging or the Fibonacci replacement.
Is Buying the Dip a good strategy?
Buying the dip may work for some people. However, it is not without its risks; such as;
- Time of recovery: By far, the most common risk is that an asset's price does not recover within a short period. This is especially risky for short-term traders who need to keep recording profit.
- The possible failure of the “buy the dips” strategy when the market does not recover. Buying the dip may not be successful when the asset value keeps dropping with no end in sight. For example, suppose you bought Bitcoin at a 50% retracement level hoping that the market would recover and the price continues to fall, ignoring Fibonacci replacement theory. A classic case of the Bitcoin dip of 2021, dipping from $40,000 in January 2021 to $20,000 by July 2021, still with a continuous dip.
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