Trading Strategy: Buying Dips
This is an effective strategy for all types of financial instruments. This involves buying into an established uptrend, so it doesn’t capture the whole trend, but is less risky than trying to do that. The steps involved are –
- establish that the market is going up
- check that the sector is going up
- the particular financial security is going up
- wait for a short-term dip in price
- wait for the short-term dip to end
- calculate trade size and stoploss
- enter trade long
- exit trade if failed or on profit
First confirm the upward trend by long-term moving average, or by looking at the charts if it is obvious. The short-term dip can be defined as the daily low being less than the previous two days’ lows, or you could use an indicator such as the RSI showing oversold for the last three days.
To determine when the dip has finished, look for the price to rise above the previous day’s high, showing that the uptrend has recommenced. The stoploss, or protective stop, should be placed below the lowest low of the last three days, as if this level is breached, the dip has not finished after all.
You could exit the trade when the uptrend appears to be over as signaled by a change in a moving average direction, or by using a trailing stop.
Join the discussion