Buy the Dips – Everything You Need to Know

Buy a decrease means purchasing an asset once the price is reduced. Here is the belief that the new low price is a bargain. Failure is only a temporary blow.

Consequently, the asset will, over time, return, and its value will increase. “Buy Decrease” is a fairly common phrase in the trading sector. 

Traders often see a decrease in the price of an asset over the short term as an opportunity. As the price drops from a higher level, many investors or traders consider it an ideal moment to enter the market.

The strategy of buying on dips is rooted in the concept of price fluctuations. By purchasing an asset after its price has decreased, investors aim to acquire it at a lower cost, anticipating gains as the market rebounds.

The practice of buying the dip varies in application but can lead to profits under certain conditions. Some traders refer to it as “buying the drop,” especially when the asset’s price dips within a long-term uptrend.

The intention behind such purchases is the expectation that the upward trend will continue after the temporary setback.

This approach is also adopted in scenarios where there isn’t a clear long-term upward trend but where there is potential for future price increases.

Thus, traders buy during dips to capitalize on potential upticks in value.

For example, suppose an investor has been buying for a long time. In that case, it reduces the investment strategy, which includes purchasing additional shares after a further price drop, which will lead to a lower net average price.

Nonetheless, if the price does not recover after purchasing on the dip, it results in a loss. As in the case of all trading strategies, buying on the dip does not assure financial gains.

There are numerous reasons why an asset’s price might decline, including fundamental changes in its value.

Limits and Dips in Trading

Just because the price of an asset has fallen doesn’t automatically make it a good investment at its new, lower price.

The primary difficulty lies in the average investor’s limited capacity to differentiate between a short-term decrease in price and a red flag indicating that the asset’s price has fundamentally lowered.

Even though there might be undervalued intrinsic worth, purchasing more shares to decrease the overall average cost of one’s holdings might not be a justified strategy for expanding an investor’s portfolio interest, especially when it’s heavily influenced by the price movements of a single stock.

A stock that falls from $10 to $8; can be both a good buying opportunity and a failure. There may be good reasons why the shares have failed, such as changes in revenue, management, poor growth prospects, economic conditions, contract loss, etc.

Nevertheless, if the situation is bad enough, the drop could continue to $0. Every trading strategy requires some form of risk control. After a fall, many traders and investors set a price to control their risk when buying an asset.

For example, if the stock falls from $10 to $8, the trader may reduce the loss to reach $7. They suggest that the shares will rise from $8, which is why they are buying, but they also want to limit their losses if the vision is wrong and the asset falls again.

It is worth noting that a drop buy works better with assets on an upward trend. The decline is a regular part of the upward trend. Naturally, most traders do not want to keep a lost investment and avoid buying during a downtrend.

However, buying downward trends may be appropriate for some investors who see value in low prices.

Conclusion

For example, we can consider the financial crisis in 2007-2008. Shares of many financial and mortgage companies fell during this period.

An investor who regularly implemented the “Buy Fall” philosophy; Grab as much stock as possible, assuming that prices would eventually return to the last drop.

This, of course, never happened. Some of the companies stopped operating after losing a significant share. In contrast, from 2009 to 2020, Apple shares rose from about $3 to more than $120.