What’s a Dip?
When talking about stocks, commodities, exchange-traded funds (ETFs), or any financial asset, a “dip” is a drop in price. Maybe a stock that was trading for $100 per share, for example, is now at $95 or even lower. That’s the dip. It’s really that simple. It’s also quite tricky. more
When people say “buy the dip,” they’re assuming that the asset is going to bounce back. The dip is supposed to be a temporary decline in price. It’s as if the asset were taking a breather before sweating out the next leg of an upward climb .
Should I Buy the Dip?
What makes this tricky is that there’s really no way to tell the difference between what may turn out to be a “dip” or a “knife.” That’s why sound money management and a well-placed stop-loss order are critical when attempting this maneuver. It also helps to map out your strategy on a price chart so you can see where to buy and, if necessary, where to exit the trade.
Buy the Dip When the Fundamentals Are Favorable
It goes without saying that a stock that’s crashing due to internal mismanagement, exceedingly high debt, an inability to generate revenue, and unpromising prospects may not be the smartest dip to buy. In contrast, a falling stock whose company financials are reasonably sound makes for a better case of a bargain buy.
But when might be the right time to “pull the trigger,” so to speak? Tomorrow, the next day, or next week?
The answer to the “when” is the “where.” In other words, asking “Where’s the best place to plot a purchase?” is probably the better question. And to answer that question, it’s best to rely on a little technical analysis. In short, we need something of a tactical map.
Buy the Dip Where the Technicals Are Favorable
If a stock that’s been trending up suddenly reverses—assuming the company is financially healthy—nobody can predict how far down it will go before bouncing back up (assuming that it does). There may also be unfavorable developments that you’re unaware of or that haven’t yet been publicly revealed.
Even if you can’t predict where prices might bounce, let alone resume climbing, you can anticipate price levels that other traders may be watching for a bounce. You can also identify price levels at which to exit your position should your buy point fail.