How to Safely Buy Dips In a Bull Market
Trade the right side of the V, not the left one, manage risk, and have an invalidation.
As we are currently experiencing a market dip, I figured I would discuss taking advantage of these opportunities. I already wrote an article on buying dips in a bull market, so please take the time to read that one as well.
You’ve been waiting for a dip, and it’s finally here, so you want to buy the blood in the street, as they say.
Keep these facts in mind:
You don't know when the dip will come.
You don't know how long it will take for the price to recover.
You don't know how deep the price will retrace.
You will be surprised and shocked from time to time.
Dips - price countertrend retracements - rarely come in just one wave.
If you trade only spot—buying coins of stocks without leverage—in a raging bull market, you will probably be rewarded for being brave and buying the red on down days—until you're punished, and the market will take it all back as the tide turns.
That is how 95% of people lose money in trading and investing. Using leverage, this can happen even on relatively tamed retracements, especially if you are using a volatile margin (coin margin). Do the math before every trade, or reap the consequences.
Reminder: always manage risk, either with stops, hedges, or better yet, smarter (smaller) position sizing, and know when you're wrong. If you do not intend to cut your losers, as most of you don't, trade tiny sizes only.
Just don't buy dips using leverage
Don't buy on the way down if you aren't extremely good with leverage. Wait for some sort of structure to form where you have a clear invalidation, and then enter your position with a stop (mental or hard).
My first leveraged loss happened the very next day I opened a leveraged account on Bitmex. I bought the dip, which I was sure couldn't go any deeper—something like 30% on the day on Bitcoin and Ethereum—and levered up on the way down. It only took me a few hours to get that dreaded liquidation email, and I lost everything on that exchange.
An expensive lesson was learned that day. Trading using leverage is not the same as spot trading.
Never add to losers - only add to winners
There are exceptions to this rule, but only if you split your original, calculated, safe size into multiple orders. If you were going to buy 100 units, you buy in increments of 10, 30... until that 100 size is reached, but no more (not 200, 300!). This way, your risk remains the same and determined up-front, as it should always be.
You can add on the way up when your original positions show profit and be protected from accumulated losses. Moving stop losses to break even on your earlier entries will lead to many prematurely closed positions, so be aware of it.
This is the smart play, but it will take a lot of discipline to resist adding to a losing position, when you are so convinced a bounce is inevitable (it is not).
Buy the right side of the V
I like this rule because it's easy to remember and evokes a visual image. The "V" in question is a potential V reversal after the price has fallen. We are still talking about buying dips in a bull market, as buying dips in a bear market is suicide!
In bull markets, dips are for buying. The problem is that those dips can be shallow or go deeper and last longer than expected.
Traders become complacent as we watch only shallow dips for weeks, sometimes months, and want to get in on the action. When we do and load up like crazy, a proper dip comes, and we are screwed.
Another problem with buying dips on the left side of the V is where to put your invalidation and stop.
Be honest - you just don't, do you? I thought so. That is very dangerous unless you trade with microscopic sizing, which allows you to play with your position "ad infinitum."
On the right side of the V, you have a clear invalidation - the last low
While you may and will often be wrong, and stop hunts beneath lows are frequent, at least you have some structure under which to manage your risk.
Look to enter position on signs of strength - buy the smaller retracement after a pump, but above the previous low.
I often look for buying opportunities in "over-under-over" patterns (image above) and 40-70% retracements (image below).
The more confirmation that the low is in you have, the higher the price will be. Unfortunately, this is unavoidable.
If you feel you just have to be a hero and catch the bottom, do it with a smaller size position. Let's say 30% max of your intended size. This way, you satisfy the itch to trade and guess bottoms. If you're right, you lower your buying price. If you're wrong, the damage is manageable.
Countertrend structures
Dips can take many forms. Most end up being a three-wave structure (ABC) or a V reversal. Keep this in mind, and don't act too eagerly.
Usually, after the price has violently retraced, it revisits the lows, often going even lower following the initial bounce.
Even if the V reversal is strong, the price tends to reverse about 50% and catch the bid somewhere above the lows.
These are a good place to make your bet.
If you miss the dip, and you will miss them - we all do - then you can wait for a retest somewhere above. Again, you got a worse entry, but the odds of this being the bottom are infinitely higher if the price bounced sustainably.
One more thing to remember: Quick bounces tend to retrace and go lower, while a slow, step-by-step recovery tends to be more reliable.
Don't be a hero - be smart instead
I know it's sexy to scream "I am the bottom" on your social media and tap yourself on the back on what a genius you are for predicting the exact bottom.
But is it smart?
Do you need to hit the exact bottom to make money?
How can you "be the bottom" (buy the bottom) without exposing yourself to unmitigated risk? (hint - small positions)
I'm going to be honest with you:
The odds of you hitting the exact bottom (or top) every time are practically non-existent.
The odds of you one day buying an endless dip that will take a massive chunk of your money, especially if you don't have good risk management, are a statistical certainty.
To conclude:
Buy the right side of the “V.” Buy strength after the price forms a structure.
Always manage risk - no exceptions.
Always expect the unexpected and make sure you can survive anything.
If you choose to buy dips while they are dumping, go slow and small.
Do with this information what you will. Anyway, that will do it. Good luck out there.