Hey everyone, Ross Cameron here! Today, I want to talk about a variation of my momentum trading strategy that focuses exclusively on buying the dips. When prices plummet and other traders are panic selling, I’m stepping in to buy the dip and capitalize on a potential squeeze back through the high of the day. This strategy can be incredibly profitable and comes with a great profit-to-loss ratio. So let’s dive in!
What is Dip Trading?
Dip trading means buying a stock when its price drops temporarily, but the overall trend is still upward. The key is to buy close to a support level, minimizing risk. You set a tight stop-loss right below your buying point, so if the trade doesn’t go your way, losses are minimized.
Why Dip Trading Can Be Profitable
Dip trading offers a high profit-to-loss ratio. When you buy near support, your stop-loss is tight, sometimes just a few cents away. If the stock bounces back, the upside can be huge—often three to five times your risk. For example, if you’re risking $100, your profit could be $300 to $500 (Results not typical).
Common Challenges for Beginners
Dip trading isn’t for everyone. Many new traders struggle with what’s known as “catching a falling knife.” If you buy a stock as it plummets without a solid strategy, you could end up with big losses. That’s why it’s crucial to have a set of rules to guide your trades.
Having a structured approach is the cornerstone of successful dip trading. It helps you avoid impulsive decisions and stick to what’s proven to work. Following a set of rules also makes it easier to spot good trading opportunities and avoid common pitfalls.
Overview of Today’s Case Study
Today’s example features the stock SNGX. It was an exciting stock that went up over 400% on breaking news, and I managed to peak at $17,900 on this stock alone (Results not typical). We’re going to break down each trade I took to show how this dip trading strategy works in real-time situations.
Universal Concepts in Dip Trading
Regardless of whether you’re trading stocks, Forex, futures, or commodities, the concept remains the same. You want to identify a trending asset and look for dips as buying opportunities. The strategy doesn’t work as well on assets that are moving sideways or in a downtrend.
How to Identify a Good Dip Trade
A good dip trade often involves a stock that’s trending upward. Look for momentary imbalances where the stock price flushes down quickly but then bounces back up. The price never moves straight up; it moves in waves. Buying at the bottom of these waves offers an excellent entry point for the next leg up.
Differentiating Front Side vs. Back Side of the Move
Understanding whether you’re on the front side or the back side of a move is crucial. The front side means the stock is generally moving up, and temporary dips are opportunities to buy. The back side means the stock has peaked and is declining, making it risky to buy dips. You can use indicators like the MACD and big rejection candles to help determine this.
Setting Up for Dip Trading
To successfully trade dips, you need the right tools and software. Monitoring level 2 data and time & sales is essential. These tools help you read the tape and understand what’s happening in real-time. Recording live trading sessions or reviewing my live trading archives can also be hugely beneficial for learning.
Specific Rules for Dip Trading
Here are some detailed rules to follow for consistent success:
- Volume and Volatility: Choose stocks up 30% or more on high relative volume.
- Entries Near Key Levels: Look for entries near half and whole dollars, as well as support levels like vwap or moving averages.
- Avoid Halt Risk: Be mindful of circuit breaker halts and avoid buying if the stock is about to be halted down.
- Trade On the Front Side: Focus on trading on the front side of the move, not the back side.
Case Study: SNGX Dip Trading Analysis
In today’s case study, SNGX had breaking news that sent it soaring over 400%. During this setup, I managed to peak at $17,900 by catching multiple dips and trading them effectively (Results not typical). Here’s how it went down. When trading dips, identifying support levels is essential. Support could be around whole or half-dollar marks, moving averages, or other key price points. For SNGX, I kept an eye on these levels to time my entries perfectly. You should aim to enter near key support levels, preferably near whole or half-dollar marks. Tight stops are crucial; if the price breaks the support level, you need to exit quickly. This strategy offers excellent profit-to-loss ratios and keeps your risk in check.
Summary of Key Rules
To recap, focus on:
- Trading stocks with high volume and volatility
- Entering near support levels and key psychological points
- Avoiding halt risk
- Staying on the front side of the move
Discipline is key to avoiding costly mistakes.
Conclusion
Dip trading has been highly rewarding for me by following a structured approach. Remember, my results are not typical, and trading is risky. Practice in a simulator before putting real money on the line and always manage your risk.
Thanks for reading! Make sure to checkout my YouTube channel, and I’ll see you in the next blog!
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Warrior Trading was founded by Ross Cameron in 2012. Today Warrior Trading is a thriving community of thousands of day traders learning to trade under the curriculum designed by Ross
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Disclaimer: The results shared are based on my personal trading experiences and are not typical. Trading involves significant risk, and past performance is not indicative of future results. Always practice in a simulator before trading with real money.