What does “Buying on weakness” mean?
Buying price action weakness is a trading strategy that enters into a long positions by stepping in and buying on a chart while it is still falling before a reversal in price. Traders buying weakness are buying a stock, call option, future contract, forex pair, or crypto currency for an anticipatory price bounce and move back higher.
When a trader is buying on weakness they are not waiting for the confirmation of a price reversal, they are buying new lows as they are occurring. Buying weakness can happen at the lows of the day, week, month, 52-week lows, or all time lows in price. The buying weakness strategy is a reversion to the mean strategy believing that a market has dropped too far and too fast and is due for a bounce. Many times an extreme oversold reading is a signal for a buying the weakness.
Buying weakness can create a lower price entry but not waiting for a reversal in price first to confirm there are buyers can lower the probability of success. Buying into weakness may create a better risk/reward ratio for the price entry but waiting first for a reversal can increase the odds of success.
Buying weakness can happen for not only entering a long position but buying to cover a short position as price is dropping to new lows in price.
Bounces in price can occur very fast even in downtrends and bear markets and a trader can miss a swing back higher without good signal timing. Most buying weakness happens after an extreme move lower on price as the rubberband of price action is stretched very far to the downside from a moving average for a trading timeframe.
Another name for buying on weakness is “buying the dip” or trying to “buy low, sell high”. A common thought is “It can’t go any lower”, sometimes it can keep trending lower so a stop loss is crucial to limit losses. There are better odds of success when buying technical weakness on a stock or index with strong fundamentals. The stock of a company going bankrupt can go to zero and during a recession a stock index can trend lower for months.
A “buying on weakness” trading strategy is the reverse of a “selling into strength” trading strategy. Selling into strength is locking in profits on a long position as price rallies to new highs on the chart.
Buying on weakness is buying low while a chart is falling with the plan to sell higher later when it bounces.