Everyone should have their own strategy and plan for trading or investing in the stock market to create an edge in their own timeframe. Each time you buy a dip in price action it should create a good risk/reward ratio and fit your own risk tolerance and have the potential to achieve your own return goals over the long term.
Here are some basic things to consider when buying the dip:
- Buying the dip works best during bull market uptrends and range bound markets around defined support like an ascending moving average or a price support area. Buying the dip during a bear market downtrend or market crash will rarely work.
- If you want to buy a dip in price you have a better chance of success buying stock market indexes or leading stocks not stocks in companies that are already in fundamental trouble. You want to buy things with built in buyers that want it that will create demand at lower price levels.
- When you buy the dip near technical oversold levels or when price is extended far from short term moving averages you have a better chance of at least a snap back to higher prices in the short term.
- The probabilities of a rally increases most the time as standard deviations from the 20 day moving average increases. If price changes are usually distributed within the parameters of a classic bell curve then approximately 68% of price action will be within one standard deviation, approximately 95% will be contained within two standard deviations, and approximately 99.7% will happen inside three.
- Swing traders and value investors buy near peak fear in the market and sell when the extreme fear passes and price returns to a normal historical range.