A KEY FACTOR TO TRADING THE DIPS IS STOCK SELECTION
BUY THE DIP… IS IT A DIP?
“Buy the dip” is a valid trading strategy and it has worked well over the last couple of years. So is there any difference this year or this dip? The main difference this year is that the indexes are going nowhere. We have seen big dips and big rallies but overall the markets are stuck in a sideways trend. One of the challenges facing us when buying a dip is knowing exactly when to buy. If we buy too early or at the wrong time then we may panic as the decline continues and begin to second guess ourselves wondering if the dip is turning in to a correction.
A key factor to trading the dips is stock selection, get to know the stock you are trading and ensure that it is fundamentally sound. Trading large cap companies favoured by institutional investors is another factor. Institutional investors play a large role in the stock market with billions to invest. They have cash flowing in annually allowing them to add and adjust positions. They can control the movement of a stock in one direction or another, you only have to look at a stock chart after an institution upgrades or downgrades it. We as individual traders can benefit from this by learning what the institutions are trading and what areas of Support and Resistance they favour.
Study your charts and find key areas of Support and Resistance, follow the progress of the stock during the dip and see where it does find its Support. Scale in to the trade which means if you have entered at the wrong time you can adjust your position – in the case of Options you can roll down and out or in the case of Stock you can average down. Pay attention to volume – look for days on which the buyers picking up shares above the daily average during the dip. You can adjust your volume bars to red and green and this will show you buyers versus sellers. Mark you charts with horizontal Support and Resistance lines and this will give you an idea as to levels being traded. It will pin point good levels to buy and sell your stock or to buy and sell options. It may stack the odds of success in your favour.
As Individual investors we do not have the financial resources of the Institutional investor but we can benefit by using our technical analysis skills to trade the dips and pull backs.