Buying the dip is a popular tactic in which investors buy an asset (ie. a stock) immediately after its price declines. A related strategy that is often used is called a pullback strategy, where investors set a buy point based on a stocks recent support level. I’ve been experimenting with trading (as opposed to investing) over the last 12 months, and this strategy is the one I would typically use. I’d rather not discuss any of the stocks I’ve invested in recently, so as an example let’s look at a similar one that I haven’t bought (and have no plans on buying in the near future). Here’s a chart for Zscaler, Inc. (ZS) that I made on yahoo finance showing the price history over the last 3 months.
Please keep in mind I don’t have any opinion on Zscaler as a company, it’s just not on my watchlist at the moment. Having said that the price history is similar to several stocks that are on my watchlist, so I figured it would make a good example. As you can see there was a pretty consistent pattern up until the end of February where the price hit (or came close to hitting) the support level a few times. Based on this pattern it looked like buying it on February 25th might have been a good idea, and the price would have headed back up again after that. Unfortunately as we know now that’s not exactly what happened here. Some people would argue that this is still a good strategy, and you should have bought again when it the price dipped again. Others will say this is a good strategy, but you should setup a stop order when you buy the stock, so if it continues to drop you would automatically sell the stock to avoid further losses. You could for example, setup a stop order based on the stocks 50 day moving average, so if the price falls below that you would automatically sell it.
After experimenting with this strategy (and a few others) for a while now I’ve decided I’m not a very good trader. I haven’t made a lot of money or lost a lot of money, but looking back over the last year since I started buying stocks I can say that I think I would have been better off by avoiding trading and simply buying good stocks when they hit a buy point and holding on to them. I also really would not recommend trying to day trade. Initially I had some luck with this, but this was back in 2020 when it was a lot easier to be successful and over time I’ve found day trading to be a waste of time for me.
So in summary I’ve decided I’m going to stick with investing rather than trading. In my case I’m going to setup buy points and then watch the market and buy a stock when it reaches the buy point I set. I’m also going to limit the number of stocks I buy to a few a month (to avoid investing too much in a short amount of time), but also make sure I buy at least one stock a month. So for example, if next month goes by and none of the stocks on my watchlist hit a buy point I’ll buy the one closest to it on the last day of the month. This way I’ll be consistently investing over time, rather than putting too much or too little into the market at once. Another thing I’m going to do is keep some cash on the side in case we see another significant downturn. I’m not sure exactly how much, but 10-20% in less volatile markets and 20-40% in more volatile markets seems about right. One more thing I’m going to do is make sure I’m buying a good combination of growth and dividend growth stocks. That way it won’t matter as much if other investors are rotating into growth stocks or vice versa at any given time. The last thing I’m going to try and make sure I do is stick with companies that I think will be good long term investments, and hold on to them for at least a few years once I’ve bought them.