In financial terms, the phrase “buy the dips” refers to a trading strategy of buying stocks or other financial products following a significant price decline. This slang phrase comes from the idea that those who are looking at financial charts will see a stock or product “dip” when the price is temporarily depressed. Unlike other strategies such as a buy and hold strategy or a long position, buying the dips is often an attempt to profit from short-term price decreases and resulting subsequent increases.
Investors also use other kinds of terminology for the same trading strategy. Finance pros or experienced investors may refer to getting stock at “fire sale prices.” This also involves getting stocks or financial products after they have declined in price. The underlying idea is that if a trader can make a purchase while a stock or product is trading below value, they can make significant capital gains later when the price rises back up.
A strategy of buying on the dips assumes several things. One of these is that the stock price will indeed go back up in the future. Experts and professionals have pointed out many cases where investors tried to buy the dips, and lost money in the end. One of the most prominent examples in recent times is the frenzied buy into Internet stocks in the late 1990s and early 2000’s, which some finance professionals referred to as the Dot-com boom and bust. Buyers who tried to buy the dips when these stocks were declining often saw the values continue to decline into near worthlessness as the investment community realized that the Internet stocks were worth less than they appeared to be.
A plan to buy the dips also requires that the investor knows when to sell. A bargain purchase price will not often do an investor much good unless he or she has a plan for what’s called profit-taking. The idea of profit-taking is that investors shrewdly understand the maximum price gain that they can get in a given time period, and sell their stocks or products at the right time, in order to get the maximum yield over time and optimize the effects of their tax situation on their capital gains.
Some investors have extremely sophisticated models for buying the dips. For instance, many traders use what’s called a Fibonacci retracement model to try to buy stocks at lower prices than they can sell them for in the short-term future. Traders do this by analyzing the most common types of dips in a market chart, and applying that knowledge to a stock’s price changes in real-time.
