Web Trader MT5
A dip is a short-term drop in the price of an asset in a long-term uptrend. This is not a reversal. It’s a transient dip – a halt or minor correction before the prevailing trend continues.
“Buy the dip” is one of the most frequently repeated pieces of advice in retail investing, based on the premise that a temporary price drop in an otherwise sound asset offers a buying opportunity. The theory works if the underlying trend is indeed intact and the pullback is a function of short-term circumstances, not a fundamental decline in the asset’s prospects.
The problem is that not every dip is a dip. Sometimes what looks like a momentary pullback is the beginning of a prolonged downturn, and buyers who go in expecting a bounce find themselves catching a falling knife. Separating the two in real time is harder than it looks.
Example: A technology stock has been climbing consistently for months. The stock drops 7% over three days as a wider market selloff on interest rate fears takes hold. The company’s fundamentals have not changed. Investors who see it as a dip and add to their position at reduced prices are rewarded as the stock recovers and continues its rise within 2 weeks.
