Crypto Investing Strategy: “Buying the Dips”
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 (as opposed to a bear market where the general trend is down).
With that said, to buy the dips one would do either one or more of the following:
1.Buy incrementally as the price goes down, creating an average position and aiming to buy more as the price decreases further.
2. Wait until the price settles, and perhaps even shows signs of recovering, and buy at that point.
3. Set buy orders at lower prices than the current price and let them fill. Setting buys just before historic support levels, large “buy walls,” and psychological levels is an especially good strategy (as prices tend to do at least a quick bounce off these levels).
One can “buy the big dips” (or buy when the price has gone well below the average), or we can “buy the little dips” (or buy when the price comes down from wherever it last was).
In all cases, the concept is the same, aiming to buy low and not high.
The logic being that this is a better tactic than waiting until prices are high (when many other people will be rushing to buy) and then exposing yourself to pressure to sell low.
i.e. buying the dips > FOMO(Fear Of Missing Out or minsan Fear, Uncertainty, and Doubt) buying at the top or panic selling the bottom.
The graphic above which shows little dips should explain everything you need to know. Here are some additional tips and tricks:
1. Understand why the dip happened. Did the dip occur due to some rumor that will likely have a temporary impact? Was the crypto overbought and now it needs some time to cool off? Did it just fail an all time high twice and now we are likely headed for a longer term correction? If you have this answer, then you can better gauge if you should be buying the dip. To this point, also keep an eye on the news. Bad news can cause a correction to deepen, good news could result in a quick turnaround (making it hard to get buy orders in if you are waiting for signs of recovery before buying).
2. Ideally you’ll want to use an proper exchange like GDAX to do this. Buying via a broker like Coinbase is an option, but great deals can be hard to manage without being able to trade quickly and set limit orders.
3. Be super careful with market orders when the price is flying all over the place. If the market is too chaotic some pretty gnarly slippage can occur. This is one reason to have limit orders already placed around supports in anticipation of the dip.
4. A conservative strategy is to wait until a price starts going back up to buy and then wait until it starts coming back down to sell. You’ll miss part of the run and you’ll miss your chance to sell at the highest possible price, but you’ll be taking safer bets a lot of the time if you wait for some confirmation of an uptrend or downtrend. This is generally true even though you could end up missing some buying opportunities this way.
5. You won’t always have time to buy once the price starts recovering. With the last point in mind, sometimes cryptos can rally by 10% or more in a matter of moments after a harsh dip. It can be next to impossible to buy into some rallies once the price starts recovering. It is from this perspective that it can be a solid strategy to mistime the bottom rather than waiting for the price to go back up. Sure, it is more conservative to wait for a trend to be confirmed, but this method can work much better after a very harsh dip down to a key support level you think the price will rebound off of quickly.
6. If you can figure it out, use MACD (the divergence and convergence of moving averages) to help you understand if we are in a bull or bear market, and to help you understand why the price just dipped or shot up. Other indicators are very useful, but MACD is particularly useful for the tactic being discussed because it gives you a quick visual of the current trend.
7. As noted above, a solid conservative strategy is to average into a dip, increasing your buys as the price goes lower. This can help you to build a long position or to make a quick buck when the price and volume pick back up.
8. Look at what the price has done over 1 hour, 24 hours, 1 week, 1 month, 3 months, 6 months, etc. and set limit orders just under highs and lows. For assets that are somewhat stagnant, this can net you solid buying and selling opportunities in the short term. This strategy essentially mimics fibonacci retracement levels, but requires none of the technical knowledge.
9. Set stops as needed. We always want to make the right moves, but no one is right all the time. If you need to, be ready to take a loss with a stop. If you have profits, considering taking some profits. No one can time every bottom or top perfectly, so lock in some gains when you have them.
10 .Long downtrends in bear markets can last weeks or months in crypto. Meanwhile dips in a bull or stagnant market can last hours or days. The trick is understanding what market we are in, in a longterm bear market you’ll want to buy slowly, in a short dip you’ll want to act quicker. If you don’t know which type of market we are in, slowly creating a position and planning for the worst is far more conservative (assuming the asset is going to zero, and making sure you have enough cash on hand to buy all the way to zero, is about as conservative as it gets).
NOTE: The image below shows daily candles on a 6 month 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 a longer term bear market (a true correction, not just “a dip”). You can see that buying the dip in this time was not ideal (not the worst move perhaps long term, just not ideal). That is the only sort of market in which you want to avoid “buying the little dips” and instead want to “buy when the price starts recovering” (as a long term investor, a short term investor can play any market if they are nimble enough).
By watching the MACD on Bitcoin, you can get a good overview of the trajectory of the market
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. 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, buy the dips…
SourceBe Positive
