Is ‘Buying on Dip’ or ‘Average Out’ a good idea?

Many of you are already trading in the stock market and earning handsome profits.

Wait!! What? Are you not making a good profit every day or at least monthly? Then, you need a good trainer to teach candlestick patterns, chart patterns, trade setups, various tools, and many more things.

You can look around for trainers, list them all, get reviews from friends or family circles, and select the best one. Also, select the appropriate courses they offer. Keep in mind your requirements and the cost while selecting the trainers.

You will learn why training is essential as we progress in this blog.

We will discuss the most open and wide-ranging advice of all the ‘so-called’ investors/traders: ‘Buy on dip’ or ‘Average Out’

They also advise, ‘buy on every dip’.

But does this advice work? Let’s find out with appropriate examples.

Stocks are not your Fiancée or spouse

Firstly, you should not encounter such a problem where your stocks go down. Wait!! What do I mean by that?

Let’s understand this.

There is something called a stop loss or book-the-profit/loss. So, once the stock starts to go down, exit if there is a profit or minor loss. Don’t be emotionally handicapped. Learn when to exit and how to identify and apply stop loss levels with the help of the training or registered advisors.

Be strict with your investment decisions. Take command of them. Ride them. Even I made losses by not following the same.

Stock is not your fiancée or spouse. Do not feel emotional about the stocks you must leave for some reason.

The market is ruthless; it will not be emotional about your losses, and the company you are investing in will not feed you for your entire life unless you have a significant quantity and pay handsome dividends.

You can buy the same stock at a cheaper level sometime in future. But when? Let’s dive into the knowledge pool ahead.

But let’s say you still haven’t left the stock. You can try to follow the idea below.

Buying on dip or Average Out

As mentioned above, the widely used advice in the market is to buy on the dip or average out the stock prices.

This means buying the stock at discounted prices so that the average cost is lower than when you initially bought it. But we often forget that the average price will always exceed the last buy price.

This is done in either of the two ways below–

1. If you already hold any stock and its price dips (goes down), add more stocks.
2. If you find any good stock with a decreased price, buy it and add more at every dip.

Some of you may even argue that we cannot predict a stock’s bottom ever, and so a good stock must be averaged out. Let’s discuss this as well in the end. Read it through carefully.

Some may argue that they are long-term investors and see no problem but only an opportunity to add stocks and hold them longer.

Let’s examine it by trying to find the answers to the below questionnaire.

1. What if the stock you are holding has always been a poor performer, and now the price has reversed below your buying level? Will you still buy an underperformer?
2. If we assume that the stock is not a poor performer but that the price has gone down only due to market conditions, do you really know when it will recover?
3. How are you so sure about the recovery of the prices and the timeline as well?
4. Who will define or decide at what dropped price you should buy the stock?
5. How will you decide about the quantity to buy?
6. What if the price drops further? Will you still buy some more stock?
7. How long will you carry out this buying operation at dip? Maybe until all your money has been invested, isn’t it?
8. Once you invest handsome capital in such stock, what will you do when other great-performing stocks are available for you at cheaper rates? Where will you bring the capital from? Will you just let go of the opportunity simply by saying, ‘Every stock is not for us, and we have to let some go’?

What’s the correct approach?

When you search for the answer to the above question, ‘What’s the correct approach?’, you will realise the need for training or guidance. Because there is a lot of material available on the internet, it may confuse you further and cause you to make incorrect decisions.

Let me explain with an example and chart of one of the stocks.

Though I am not a trainer or a registered adviser, I will still attempt to disqualify the thoughts of ‘Buy on dips’ or ‘average out’.

Please see the chart below –

Courtesy Trading View (Free Version) – Thanks for that.

1. Stock is Reliance Industries (India), Year 2023
2. Trendline shows how stock fell from 1250 to below 1000 INR
3. As you will see, the time frame for falling stock is nearly 83 days (nearly 3 months on a trading day basis)
4. Stock fell for 11 times during 83 trading days,
5. Since the price is above INR 1000/- if you have to buy one stock, you will need a minimum of INR 2000/- (1*Stock price)
6. At every dip, you will require a minimum of INR2000 so at 11^th time, you have already invested above INR 20,000/-. Quite a low amount, right?
7. The amount is low because there is just one stock. Now multiply the price by the desired number of stocks you want to add. If that is 10 stocks, you need a minimum of INR 12,000/— each time, and now the total investment crosses 1,30,000/-INR (12,000 * 11 times).
8. You may also bring that investment, but what will you do to your average price, which is way above CMP – Current Market Price?

Now see the revised/updated/upgraded/trained thought –

Please see the chart below – Courtesy Trading View (Free Version), Thanks for that.

1. The correct approach is to buy on a rally when you see a bullish trend in your favourite stock
2. Look at the rally from number 12 to 17. In 78 days, the stock crossed an earlier high of 1250 which was the price before 129 days. So, you received the advantage of the rally in the half-time frame.
3. Unlike earlier, now you will have to invest only on 6 times (12 to 17). Before, it was 11 times. Nearly half now.
4. You can now invest as much as possible because the stock is now in the rally.
5. Your investment at number 12, would give you maximum returns, and the subsequent buying can give you good returns as well. Basically, all such buying will give you returns.
6. In an earlier case, all your investment was in Red.
7. In a way, you are averaging out the stock. But in the earlier case, the average price was above the CMP. In this strategy, the average price is below the CMP. Which is better? Think about it.
8. Your mental health will be stable. You will stop blaming the market and your luck. These are some other advantages.

Let me know your thoughts in the comment section below, but before that, please have some answers to your common questions.

Q – How would you know the stock has bottomed out?

A – Looking at the significant supports, candles, chart patterns, reversal chart patterns, tools, etc., you can find that they are near the bottom of the trend. As mentioned at the beginning, a good trainer will help you gain all this knowledge, confidence, and eligibility to determine the bottom/near bottom of the stock trend and reversal from that point.

In the above chart, there is a reversal chart pattern called ‘inverted Head and shoulder’. This clearly indicates that the stock is near the bottom and that a reversal is possible.

Q – How would you know if the stock has topped and a possible downtrend has begun?

A – I will give you the same answer as the abovementioned one.

Q – What if suddenly stock retraced back from the rally? What will happen to our investment?

A – The answer lies in the chart pattern, stock news, and tools to analyse the charts. Again, training and practice will help you. Also, a stop-loss order will always trigger if such sudden things happen, provided you have set it. Remember, taking some loss or less profit is better than losing significant capital. You always have another chance to check for bottom out and reinvest in the same stock. From the example above (Reliance Industries), is it better to lose some 2000 to 5000 in stop loss than losing 15000 to 20,000 in total capital? Comment in the comment box below.

Conclusion

Remember, no strategy works 100% in the stock market, but we still invest and try to earn. Then why not try to earn or limit the risk using the tools taught in the proper training and guidance?

Do you now think buying on a dip or averaging out is good? If you still want to do it your way, then at least hedge your investment. Now, how to do that, again, is a separate topic for discussion and subject to training.

Never underestimate the power of candlestick patterns, chart patterns, rallies, and downtrends, as well as the tools and training for such chart analysis.

I hope you gained some knowledge from this blog.

Investment in stock, bonds, commodities, mutual funds, etc., is subject to market risk; please check your risk appetite and read the offer document carefully before investing or at least take advice from registered investment advisers.