“Buy The Dip”: Understanding The Dip, And The Market Condition

What Is Buy the Dips?

“Buy the dips” means purchasing a coin or an asset after it has dropped in price. The belief here is that the new lower price represents a bargain as the “dip” is only a short-term blip and the coin, with time, is likely to bounce back and increase in value.

KEY POINTS TO NOTE:

Buying the dips refers to going long on coin, that is investing back on the coin or security after its price has experienced a short-term decline, in repeated fashion.

Buying the dips can be profitable in long-term uptrends, but unprofitable or tougher during secular downtrends.

Dip buying can lower one’s average cost of owning a position, but the risk and reward of dip-buying should be constantly evaluated.

Understanding The Dip And Market Condition

Buying the dip is a universal trading strategy for most financial assets in the crypto market. But it’s an especially popular strategy for trading Bitcoin alongside other promising alt-coins because crypto trends tend to be unusually long and strong. As a result, it’s challenging for traders to catch the opportunities, which results in traders buying at higher prices. Therefore, waiting for a corrective dip to unfold provides traders an opportunity to enter into the position at a cheaper price and accumulate more coins than if they bought them at a higher cost.

Dip buying can appear in any financial market. However, buying the dip in crypto can be different from employing the strategy within other financial markets.

Typically, the trends in the crypto market are stronger and the volatility is substantial. Therefore, when a corrective dip unfolds, the correction in crypto can be more significant than in other financial markets.

Take Bitcoin in 2021, for example. Bitcoin started the year by doubling in value. As the price continued to ascend, corrective dips were relatively shallow, between 18% to 31%. However, when Bitcoin’s price reached $64k, a larger crash began to unfold in the summer of 2021 which resulted in a 55% correction.

This is the biggest challenge in buying the dip with crypto. You may buy on a 20% corrective dip, only to find the crypto market eventually crashing over 50%. A long-term investor (HODLer) believes that buying the dip simply allows them to garner more coins while crypto is still early in its adoption stage. Their rationale is that if the price increases dramatically, their stash of coins could produce life-changing wealth.

Does Buying the Dip Work for Altcoins?

For some Alt-coins, The strategy of buying the dip can be utilized. A few alt-coins that are large enough within the top 20 by Market Cap could be candidates for buying the dip.

This is because there are enough buyers and sellers to balance each other out so that the larger price trends appear on the chart.

Examples Of Buying The Dip

Buying the dip is really about market timing, with two common strategies. The first involves adding support trend lines to the charts, and the second is using an oscillator, such as RSI, to help identify turning points.

Let’s start with trend lines. When the market is in a strong uptrend, look for common swing lows, and connect them with a trend line. Extend this trend line to the right, and it should be below the current market price.

Then, as a corrective dip unfolds, look to buy when the price reaches the support trend line, while targeting new highs. This process can be repeated — again and again — as the market frequently dips, even within a strong uptrend.

In the image above, a support trend line can be drawn for Bitcoin from January to April 2021. There were multiple occasions where Bitcoin’s price dipped to the trend line, offering an opportunity to buy.

Managing Risk When Buying the Dip

All trading strategies and investment methodologies should have some form of risk control When buying a coin after it has fallen, many traders and investors will establish a price for controlling their risk. For example, if a coin falls from $10 to $8, the trader may decide to cut their losses if the coin reaches $7. They are assuming the coin will go higher from $8, which is why they are buying, but they also want to limit their losses if they are wrong and the coin keeps dropping.

Buying the dips tends to work better with coins that are in uptrends. Dips, are a regular part of an uptrend. As long as the price is making higher lows (on pullbacks or dips) and higher highs on the ensuing trending move, the uptrend is intact.

Once the price starts making lower lows, the price has entered a downtrend. The price will get cheaper and cheaper as each dip is followed by lower prices. Most traders don’t want to hold onto a losing coin and avoid buying the dips during a downtrend. Buying dips in downtrends, however, may be suitable for some long-term investors who see value in low prices, which is considered the best strategy.

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