“Buying the Dips” in Cryptocurrency
A basic investment strategy can be phrased as “buy the dips.” This doesn’t mean go all in while an asset’s price is going down, it means average in as it goes down and/or buy after it settles.
Further, this strategy is much safer to use in a bull market or a stagnant market, where the general trend is up or sideways (as opposed to a bear market where the general trend is down).
With that said, to buy the dips one might do one or more of the following:
Note: See the chart below for examples of support levels. In this case, these are horizontal levels where price has previously consolidated and sloping trendlines that price is reacting to as it moves up. These are logical places to buy the pullback (AKA “the dip”). Front-running clear support levels with a stop below the level is often more effective than just blindly buying every dip.
The green arrows show support levels that were effective to buy when price “dipped” to them.
With that all noted, and as you can see on the chart above, one can “buy the big dips” (or buy when the price has gone well below the average), or one can “buy the little dips” (or buy when the price comes down from wherever it last was).
One can “buy the dips” to sell quickly for a profit, to build a long term position, or to incrementally take gains.
In all cases, the concept is the same, aiming to buy at a lower price when price consolidates or corrects.
Although there is logic in buying into strength, even in a bull market it is often a better tactic to buy pullbacks than it is to wait until prices are high (when many other people will be rushing to buy) and thus exposing yourself to pressure to sell low.
i.e. buying the dips > FOMO buying at the top or panic selling the bottom.
At its simplest then, this strategy involves buying when the price is lower than the last high. At its most complex, it involves studying charts, paying attention to short term and long term moving averages on different time scales, identifying historical support levels, laddering buys, and placing stops. Whatever your level of skill is, however, the concept is generally the same.
In crypto, we see many little dips, and then every few weeks or months we tend to see some very big dips (we might call “corrections” or “crashes”). Both little dips or big dips can make sense to buy depending on your investing strategy. If you are range trading, then little dips are great to buy, if you are a long-term investor, then the bigger dips can be rewarding for building a long position (but of course you have to be careful about how you time your buys).
Of course, timing the bottoms of those dips is next to impossible… and that is why it can help to buy incrementally as the price falls.
The bottom line here being, there is more than one way to “buy the dips” (with crypto or any other asset). However, all versions of this strategy aim to buy at low prices rather than high ones by buying when others are selling.
This means one has to use a little counter-intuitive logic and fight off some emotions. Specifically, one must:
The strategy isn’t guaranteed to be successful, but it is a smart and simple investing strategy that doesn’t take much skill or technical know-how to implement.
Meanwhile, as eluded to above, if you want to add technical aspects, you can look at things like moving averages, support levels, RSI, and volume to get a sense of how low a price might go and get a sense of when recovery is likely.
With the technicals added in, “buying the dips” can become a pretty solid strategy with a high success rate, without them, it is still generally better than FOMO buying the top or panic selling in a stagnant or bull market when the price pulls back (as it WILL pull back, crypto is volatile).
The graphic above which shows little dips should explain everything you need to know. Here are some additional tips and tricks:
NOTE: The image below shows daily candles on a 1 year BTC chart. When the short term 12-day exponential moving average crossed under the longer term 26 day in January 2018, it pretty clearly marked the start of a bear market in retrospect (a true correction, not just “a dip”). You can see that buying the dip and holding in this time was not ideal (not the worst move perhaps long term, and not a bad move for short term trades, just not ideal for a buy and hold strategy as far as we know so far). That overarching bear market is an example of a market in which one has to apply a bit more nuance to their “buy the dips” strategy.
TIP: The charts below will give you another way to look at bull and bear markets. Take heed dip buyer, dip buying is best suited for bull markets!
Nasdaq bull vs. bear 1985 – 2018.
Bitcoin, bull vs. bear. 2011 – 2018.
TIP: In cases where the price of a coin (or another asset) is plunging slowly towards its doom, buying the bottom of a dip can be hard if not impossible to pull off (i.e., buying the dip in a crash can often be a fool’s errand). In cases like this, you more so end up dollar-cost averaging down the side of the mountain. Watching any asset lose value is stressful, but there is a lot of precedent for this paying off in cryptocurrency when we are talking about buying the dips on top coins like Bitcoin, Ethereum, and Ripple. No plan is foolproof, but the logic here is this: It is better to mistime buys at the bottom than to mistime buys at the top. Thus, buying the dips trumps FOMOing on the rallies, even under the worst market conditions.
TIP: If the RSI is really high (like 70+ on all time frames), then the asset is considered “overbought” and the rally probably only has so much longer to go before a dip. If the RSI is really low, like 30 or less on all time frames, we are “oversold” by that indicator. There is no actual limit to how high or low the RSI can go, but you can see in the chart above (which shows the RSI on daily candles) that the oversold and overbought states are not the norm and are generally not sustained for long. Simple indicators like this can help you time your trades when timing your trades. Just remember, indicators help you analyze historic data, they can’t predict the future!
This content was originally published here.
