Buying the dip is a popular trading term for the moment when markets hit a relative bottom. Over the last couple trading days, U.S. markets have been noticeably down, and this is something that a lot of people are talking about. But, is it worth it? During a dip in prices, you time your trades as perfectly as possible so that you are buying right before prices start to go up. It’s a variation of the old adage: buy low, sell high.
There’s a major problem with “buying the dip,” though. There’s no way for you to know where the bottom is. What ends up happening instead is that traders purchase shares of a stock when they think it has bottomed out, and then the bottom was actually only a brief stop before the price dropped even more. What happens even more than this, though, is that the price only rises a small amount, and the gains weren’t enough to offset costs and commissions. When people use indices to trade with, this can be even more pronounced. And unfortunately, these are the most predictable parts of the market since they are summaries of the whole.
Of course, there are other ways to trade a bottom. Day traders do well by keeping their trades only open for a few minutes at a time. This allows them to still get a profit while decreasing exposure within the marketplace. This takes a huge amount of money to be worthwhile, though, and the average person doesn’t have enough in their accounts to qualify as a day trader. Federal requirement mandate at least $25,000 at this time.
Other markets make this easier for you. The Forex market lets you use leverage to multiply your trading power so that you can see a currency rise or fall by a fraction of a penny and still profit enough to make a profit. Binary options do not need a lot of movement, just movement in general, for you to reap a full 78 percent or so in profits. Binaries also have the added feature of allowing you to trade indices for cheap without extra fees, which make them great for general trading like “buying the dip” as was discussed above.
Rather, this is best as a long term strategy. History has shown us that markets like to go upward, and when prices bottom out, that’s a good time to place your money. It says that the markets will be going up soon, and your earnings will grow without the stagnation that a sideways market often has. Over time, the benefits of this will add up, especially if you are not regularly investing your money. Regular investors will see these things smooth over, but periodic investors can time their entry points to take advantage of this.
Investors do not need to be the only ones to benefit from this, though. Traders can and should benefit from low points, but it will either take a lot of money if you go with stock or indices, or a lot creativity if you go with the Forex or commodity markets, as you try to anticipate how stock markets affect other asset types. Binary options present you a nice solution by giving you access to profits for small amounts of cash, but what you decide to do is up to you and your background. Many beginners and small timers with a lot of experience find the low entry costs to be an easy way to create quick cash. Either way, when markets are down, a profitable opportunity comes up, and it should be seized.