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Buy the Dip: Is Buying the Dip a Good Trading Strategy?

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Written by Timothy Sykes
Updated 2/3/2021 15 min read

‘Buy the dip’ is our generation’s ‘buy low, sell high.’

Both can be good approaches to the market. But neither has stopped traders from blowing up their accounts.

So today we’re gonna unpack the buy the dip meme. I’ll show you what a dip looks like on a stock chart. Then we’ll talk about how you can trade this pattern.

I also want you to know why this is such an awesome part of the market today. It’s not just because buying the dip can be such a repeatable strategy in this market. It’s also because it’s your first lesson in seeing the market in Matrix time.

Picture this: A stock is running in premarket. It’s got several green days behind it, and everyone wants in. It rockets up 50% … 75% … 100%.

Then the market opens, the early traders cash out, and it slams back down.

Is this a bad sign? Sometimes. But it can also be your opportunity to catch the stock before its next spike.

If I’m making it sound simple, I apologize. It’s not. You need to understand what’s a future breakout and what’s built on hot air from sketchy promoters and chat rooms.

If you’re new to this, start studying with my FREE penny stock guide. This will give you the lay of the land. And then watch my YouTube playlist, “30 Trading Videos in 30 Days.” These videos will take you through a ton of trading basics.

You might be looking for a surefire way of making money off the market. There’s nothing like that anywhere, but I’ll give you the closest thing to it…

Work your butt off learning these concepts.

What Is Buying the Dip?

what is buy the dip
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Buy the dip can change meaning, depending on your trading strategy.

At its most basic, a dip is a chart pattern where a stock pulls back after uptrending. Theoretically, the uptrend should continue after the dip.

What’s Considered a Dip in the Stock Market?

whats considered buy the dip in the stock market
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I’m a big fan of intraday dip buying, like in the video above. But buying the dip can happen in any time frame.

Longer-term traders might look for patterns in the past year or five. They’re looking at a stock’s long-term trend. For them, a dip should be a small interruption in this trend.

A great example of a dip in a longer time frame is the March 2020 crash. Stocks uptrending before March have recovered to their pre-crash levels and more. For long-term traders, this represented a prime dip-buying opportunity.

I’m primarily a day trader. This doesn’t mean I won’t be looking at a stock’s chart for evidence of a continuing uptrend. But I’m also looking for a stock to recover on the day when I dip buy long.

This means that I look more to market mechanics than long-term trends. A perfect dip buy for me is a recent runner … I want to see a fall near the market open when some traders take profits and other traders get stopped out.

Then I rely on dip buyers who missed the initial run-up and short sellers who are buying to cover. This waiting audience usually brings the stock’s price back up.

I’m relying on market psychology, not anything fundamental about the stock, in my dip buys. I don’t have any deep belief in the stock itself. If it fails, I get out quick.

Buy the Dip vs. Buy and Hold

buy the dip vs buy and hold
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Traditional advice is that trying to time the market is a bad idea. Market experts advocate the tried-and-true buy-and-hold strategy. They point to research that shows the passive approach always beats the active.

For the most part, this advice is absolutely correct. But you’ve gotta understand where it’s coming from.

These keepers of the great tradition of trading are correct because most dip buyers are in the money mindset. Yep, they’ve got the greed bad. They see a stock dropping 30%, 40%, and assume it will bounce right back up after they buy it.

This is why they invented the phrase, “Don’t try to catch a falling knife.” If the knife in question is a sketchy penny stock, it might even land in your foot.

But for dip buyers who know what they’re doing, this advice is just insulting. It’s another version of “Don’t try this at home, kids.”

Buying the dip could potentially work for you if you have a system and follow its rules.

The Benefits of Buying the Dip

the benefits of buy the dip
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Well, there’s one big benefit to start off with — the potential for quick gains if you pull this setup off.

But we’re gonna look past money here. There are a few reasons why this tactic will help build your trading repertoire.

It’s Repeatable

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The morning panic dip buy pattern is my favorite because it’s repeatable.

It’s like an omelet recipe. Follow a few basic steps and it will usually be edible. Sometimes it’ll even be great.

It Teaches You How the Market Works

Morning dips feature all my favorite characters in the stock market. There are clueless traders, short sellers looking desperately to cover, and FOMO-filled longs. It’s the human comedy in one chart.

What Are the Risks When Buying the Dip?

what are the risks of buying the dip
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I know I’ve talked this up. But there are real risks. You have to know when to hold ‘em and when to fold ‘em.

Here’s a PSA on when buying the dip goes wrong… on a very special buy the dip YouTube video:

Falling Knives

They really hurt when you try to catch them.

Sketchy Companies

If a stock is free falling, there’s usually a reason. Morning panics don’t usually happen to Apple or Facebook.

Buy the Dip in Bitcoin

For traders who like volatility (like me), bitcoin can be pretty fun.

I personally don’t trade bitcoin, but some of my students say they do.

When bitcoin crashed at the end of 2017, I warned traders not to get too excited about a dip buy. And sure enough, the bounce failed. It would take another year before bitcoin reached the end of this downswing.

Then, just like a penny stock, bitcoin had a ridiculous run-up in 2017. And then came the dip. Then the failed bounce led to lower prices — the real dip.

I never have any attachment to anything I trade. Whether it’s crypto or some stock, traders shouldn’t care where it’s priced. We just want to see volatility, and dips are definitely a part of that.

If you don’t know why volatility is important, don’t pass go, and don’t collect $200. Get my no-cost “Volatility Survival Guide” ASAP.

When Should You Buy the Dip? 4 Tips to Find Dropping Stocks

when should you buy the dip 4 tips to find dropping stocks
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1. The Stock Has Been Up a Lot

I want to dip buy stocks that have been up for several days. The longer it’s up, the bigger the panic can be.

A lot of traders set stop losses near the price they bought the stock at. When the stock falls, it’ll start triggering all these stops. It’ll free fall as the sell orders pile up.

Think of bid-ask like a seesaw. As the stock falls, sell orders start piling up in the ask column. The bids keep getting taken out as the stock tumbles.

You wanna wait until the buyers come in — but that’s not until later.

2. There’s No Bad News

This is my “don’t try this at home, kids.” Even though I’ll occasionally buy the dip on super sketchy stocks, I don’t recommend it. Especially if you’re new to this.

What’s bad news? Maybe the FBI just raided the company’s headquarters. Or maybe the company’s doing a toxic financing.

Avoid companies headed for bankruptcy.

3. It Stabilizes Below a Round Number

Penny stock “investors” — just like us traders, but dumber, right?

One of the dumb things that investors do is catch a sketchy stock in its run-up and hold onto it. It’ll keep grinding up 10%, 20% each day. They feel good and smart and set their stops at a level where they’re comfortable exiting.

But they don’t understand that their trading plan is built on sand. Maybe the stock will gap down through their stop, and their broker will issue a market sell order. They’ll probably get less than they hoped.

Or maybe they’ve set a stop-limit — but odds are it will be too tight to execute in a free fall. So they’re left with a triggered stop and an unexecuted sell order. Hence, the panic.

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The stock’s free fall gathers momentum with each round number it crashes through.

Stops tend to cluster in 10- or 25-cent increments. I’m only comfortable buying in once the stock shows support around an odd number. So maybe I’d look for the bottom at $3.91 instead of $4, as an example.

4. Level 2 Shows Support

Level 2 quotes are your friend.

This is where you can see the turn happening. There should be a wall of buyers at the bottom. You see this by the bids stacking up in the Level 2 section of your trading platform.

Now, if you don’t know how to read Level 2 quotes, I’ve got six hours on it right here. Actually, I have a lot more than six hours talking about Level 2. My point is, it’s REALLY important.

If your trading platform doesn’t have Level 2 on it, don’t trade dips until you get one that does.

My preferred platform for Level 2, scans, charts, and more is StocksToTrade. It’s my favorite trading platform out there, and, not coincidentally, the one I helped design. I’m also an investor in it.

StocksToTrade is the complete package for dip buying. It’s got the cleanest and most precise charts out there. The news scanner grabs news catalysts from a ton of sources. The stock screener is built for setups like dip buys.

Is Buying the Dip a Good Trading Strategy?

buy the dip is a good trading strategy
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I have a system that I follow with this. You need a system. If you don’t have a system, you might get lucky a few times, but eventually, you’ll crash and burn.

I’m not talking about some kind of complicated ‘buy the dip’ algorithm. But you should be able to list some indicators that you think will move the stock back up.

I’ve got 850+ dip buy video lessons and 550+ morning panic lessons. You get access to them all when you join my Trading Challenge. Just as crucial: You get access to an awesome community of traders.

We believe in transparency at the Challenge. And we have a chat where people don’t just boast about trades. They share their trading plans so you can see how they approached a trade.

And you know what? I believe in transparency so much that I list all of my trades here.

Frequently Asked Questions About Buying the Dip

frequently asked questions about buy the dip
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Does Buying the Dip Really Work?

It works except when it doesn’t work. That’s why you always have an exit plan and cut your losses quickly.

What Happens If I Buy the Dip Every Day?

I don’t encourage you to trade big in the beginning, I encourage you to study big. You may not find the pattern every day. The key is to learn to spot it on your own and be prepared for it with research, a plan, and discipline.

The Bottom Line — Should You Consider Buying Dips?

the bottom line should you buy the dip
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I’ve gotta underline this point. You should do what works for your trading strategy, not what other people say to do. That’s being a self-sufficient trader.

Dip buying has been awesome for me. I think it’s definitely something worth learning. But I’m not gonna encourage you to trade any specific setup.

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What I will encourage you to do is to STUDY UP! Keep digging through my no-cost resources, and look at my Trading Challenge when you’re ready.

Whenever that is, rest assured there will be trades.

Do you buy the dip? What did you learn from this article? Let me know about your experiences in the comments! 

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”