As we traders try to find any advantage to take home more profits, its important to realize that every second matters when it comes to getting the price and entry you want.
One mistake that we all have made as beginner traders is to do the opposite of “Buy the Dip, sell the rip” or “Buy Low and Sell High”.
It all sounds very simple, however in real time it is not that simple. When you are trading real money your emotions will often want to take over your rationale.
What really happens is you see a stock you are interested in and you say “oh my goodness i love the way this is setting up.” Now its time to enter, but….
You hesitate. You want to see more confirmation. Maybe just a little bit more. The price you were suppose to enter is now leaving you and each tick that is going in the favor that you wanted is now making you do the following…
1.) Make you feel bad about not entering when you should have
2.) Makes you feel more confident in entering because it continues to move in your favor
3.) F.O.M.O (Fear of Missing Out). You now regret not entering + you feel that the stock will continue to go higher. you think “why would I sit out of this trade when its doing what I want it to do”
What then typically happens is the stock you now enter late into now reverses, whether it be a pullback or a straight dump. This now makes you nervous especially if you have big size on.
More often than not, you will be shaken out of the trade for a loss. Then to make matters worse, the stock you now exit out of now reverses to go back in your favor.
These 3 reasons in my opinion are the main reasons why so many new traders end up buying at the top.
I have done it plenty of times as a new trader so don’t feel bad. We were all new at some point.
The main key that was explained to me was that …
We do this because it is human nature to want to see confirmation first before we take risk. So when we see the stock continue to climb without us, the more tempting it is for us to jump on late.
Perfect example: Bitcoin at $17,000-$20,0000.
Now, whats the solution?? Buying at the times when its uncomfortable.
Simple but difficult at the same time.Let me explain some more.
When you have a stock that you are interested in and you want to buy it, the best time to my is usually during a pullback. That means when the stock makes its move upward in a volatile manner , you don’t buy into that move.
You buy the pullback because it is literally buying at a better price. That is the way you have to think.
In this picture above, you will see where I recommend to buy and where not to. In the moment it will be hard to buy the dip for beginners , but think about it like this.
In the first area there is a difference of .37 cents from the the top at $2.00 from the bottom of the pullback to $1.63. If you bought the top with 5,000 shares and were waiting for it to come back above 2 dollars, that pull back would have made a draw down of -$1,850 dollars.
Ouch. -18.5% On your position. (5,000 Shares X $2.00 = $10,000….($1850/$10,000) X 100 = 18.5%
Compare that now, if you Bought at $1.70 for 5,000 shares. The most you would have been down would have been $350 dollars.
Also, if the stock still went lower, maybe $1.50 lets say.
You still would lose less money than the person who bought at the top, since you average price is lower.
Buying dips or pullbacks will literally make you more money if the stock goes in your favor, and still save you more money if the stock goes against you.
It just takes time to get use to it, but overtime it was one of the most beneficial things you can do to enhance your trading.