What is Buy The Dip (BTD)?

'Buy the Dip' is a term used in investing and trading to refer to a strategy that involves buying an asset when its price has dropped significantly. This strategy is based on the belief that the asset’s price will eventually recover and the investor will be able to make a profit.

It is a contrarian approach to investing, meaning it goes against the prevailing trend. This strategy works best when there is a clear trend in the market and when the asset has been trending downwards for some time. The idea is that the asset is oversold and so it represents a good buying opportunity.

The ‘buy the dip’ strategy is often used by investors who are looking to make a quick profit as the price of the asset is unlikely to stay low for long. It is a risky strategy because there is no guarantee that the price will recover. If it fails to do so, the investor may suffer large losses.

The strategy is most commonly applied to stocks, particularly in the short-term. It can also be used for other assets such as commodities, cryptocurrencies, and currencies.

When applying this strategy, it is important to have a clear understanding of the asset and the market it is in. This includes having a good knowledge of the fundamentals, as well as an understanding of technical analysis and the support and resistance levels that are important.

In addition, it is important to consider the timeframe that the investor is aiming for. If the price of the asset is expected to recover quickly, then it may be worth taking a risk and buying the dip. However, if the recovery is expected to take longer, then the investor may want to wait until the price is more stable before investing.

Simplified Example

"Buy the dip" is a common phrase used in the stock market and can also be applied to cryptocurrency investing. Imagine you're at an amusement park and you want to ride a roller coaster. The ride has its ups and downs, just like the stock market or the value of cryptocurrencies. When the ride is going down, that's like a dip in the market. The idea of "buy the dip" is to take advantage of these low points and purchase stock or cryptocurrency at a lower price, with the expectation that its value will go back up and you'll make a profit. It's like buying a ticket to ride the roller coaster at a lower price when it's temporarily not as popular, with the hope that you'll be able to sell the ticket for a higher price later on when more people want to ride it.

History of the Term Buy the Dip

The phrase "buy the dip" emerged as a recognized strategy within the financial landscape, gaining traction notably in the late 20th century, particularly during the 1990s.

Rooted in the idea that market downturns or temporary price declines often offer favorable opportunities for investors to acquire assets at reduced prices, "buy the dip" became a popular adage among traders and investors. It emphasizes the strategy of capitalizing on short-term market declines, showcasing confidence in an asset's long-term prospects by purchasing it during these moments of market corrections or dips.

Over time, especially with the rise of online trading and the cryptocurrency boom in the early 21st century, "buy the dip" became a widely embraced approach in investment circles, demonstrating a belief in the resilience and growth potential of various financial markets during periods of price fluctuations.

Example

Example 1: The belief here is that the new lower price represents a bargain, as the "dip" is only a short-term blip and the asset, with time, is likely to bounce back and move upwards or go beyond its intrinsic value.

Example 2: The concept of buying dips is based on the theory of "price waves". When an investor buys an asset after a drop, they are buying at a lower price, hoping to profit if the market rebounds.

Example 3: If an investor is already long and buys on the dips, they are said to be 'averaging down', an investing strategy that involves purchasing additional shares after the price has dropped further, resulting in a lower average purchase price.

Example 4: Buying the dips does not guarantee profits. An asset can drop for many reasons, including changes to its underlying value. Just because the price is cheaper than before doesn't necessarily mean the asset represents good investment.

Related terms

• Day Trading: Day trading is a way of buying and selling assets quickly in order to make a profit.

• Bull: A bull in investing is an investor who expects stock prices to rise in the near future and is therefore willing to buy and hold stocks for the long term.