Following on from my last article on the Cup and Handle Pattern I want to get a better grasp on Dip Buying.
Just like buying a house, a car or even an antique at an auction, you don’t want to pay maximum dollar for it with your bid, only for there to be very little upside in price/value. This applies to stocks as well.
Now of course you could be a long term investor instead or a bag holder as many of us like to call it, and hold on to your stock for years in the hope that it makes you lots of money over a period of time.
I don’t like the word “hope” and especially not in the stock market game.
In order to get the best price for your stock, you must have a determined and predefined strategy before you put in your bid/ask order, and the same applies when you short sell as well.
So with a planned strategy in position that you stick to, you are far more likely to be a consistent profitable trader and safer one too.
It was actually by spotting $ACPW (Active Power Inc) today (27th Oct 2015) that made me want to get into more precise detail about Dip Buying.
While quickly screening with finviz, I looked for earnings release dates for today that fit my stock pick criteria, and although only 5 came up I liked the chart pattern of $ACPW.
Even though I’m not trading until November time; yes I know I keep saying that, but I like to be transparent so that you know I’m still learning even though I’m not trading.
~You can’t expect to succeed in anything without consistently practising, Until it becomes effortless~
So while still doing my day job delivering parcels, I had my kindle in front of me to keep an eye on the earnings release for $ACPW to see whether it would be positive or not. You can see my screen shots and more on Profitly.
Trying To Keep An Eye On $ACPW With Level 2 While Delivering Parcels!
As you can see below, I have to admit that the chart for Active Power Inc is NOT the best with regards to volume or volatility, but there is enough activity there to make a spike of a small degree with good news and volume. With the news of an earnings release coming out for $ACPW, I wanted to see what could happen with positive news on this stock pick.
Simple Chart of $ACPW (27/10/15) on Fiviz.com
The Earnings Release was reported before market open and is an earnings winner, as it has positive news. I couldn’t spot any bad press in their statement at all.
With an earnings winner you would anticipate and expect it to spike up right after the market open, but surprisingly it did the opposite and plunged from $1.67 to $1.42 in about the first 30 minutes of trading.
With trading the stock market you’ve got to understand that there is NEVER any guarantee as to what happens next with any stock, and this is why you need more than one plan when you’ve got your eye on a certain stock that you want to trade.
Due to my day job (13 working days left to go 🙂 ), it is very difficult for me to be able to study everything and see all the news releases as they happen right away, as well as be focused on what the share price is doing with any give stock.
When I start trading in November I will be able to prepare and be 110% focused on trading.
If I was able to research $ACPW more thoroughly I would have been able to plan a strategy that would set me up to trade this stock if certain dips happen and opportunities occur.
I’m glad I have seen this stock do what it did today, because it has taught me to have more than one plan of action prepared before considering any trade at all.
If you take a look at the next chart below from this free software, you can see in better detail with 5 minute candles as to what happened to Active Power Inc today.
5 Minute Candle Chart Of $ACPW
Looking at the above chart there is not really all that much information that you can get from it besides that the share price dropped 25 cents after the market open and then bounced back up to hit a daily high of $1.72.
If on the other hand you looked at the monthly chart of this month being October, you can see the potential opportunity much better.
Month Of October With Green Support Line At $1.44/$1.45 ish
So by looking back at how the past month has gone, you can see that there is support at around the $1.47 area. I have drawn a green line at the $1.44/$1.45 area as an approximate mid-point line for support.
By witnessing $ACPW behave how it did today has better tuned me in, to have not just one plan of action, but three!
So instead of being prepared before I make a trade and saying that I will wait for “XYZ” to do this before I place my trade, I am going to say:
- If “XYZ” Stock does this, then I will buy/sell it at this price.
- If “XYZ” Stock does that, then I will buy/sell it at this price.
- If “XYZ” Stock does neither, then I will do nothing!
By doing your homework and seeing where PAST support/resistance is you can improve your risk/reward ratio greatly. As there is never any guarantee as to what any stock will precisely do, you have to have a plan of what to do if it does the opposite or nothing at all!
So with this idea, if I had planned to trade $ACPW with this new idea in mind, it would go like this:
I have seen the positive earnings release now so I would be looking to go Long, and all I need to do is wait for the market to open to see if I can piggy back a moving up spike/breakout or whether I need to wait for a Dip Buy.
As soon as the market opens, I wait to see where the price action is and how many buyers/sellers are in the room.
So while watching my level 2 screen I would see that there are more sellers than buyers in the room and would also see the price start to fall with $ACPW.
As I’ve done my homework I would know that there is past support at $1.50, but the more solid support is around the $1.45 area so I could wait to see if it goes this far. I am also able to see what’s going on with sellers and buyers from my level 2 screen, so I can see which support level is stronger quite quickly.
With the more solid support being the planned result I would wait for buyers to appear to drive the price up on this earnings winner.
It goes as low as $1.42 and that’s ok as I would still be waiting to see if any buyers appear, and sure enough they do. So I would have tried to enter my Dip Buy on a Long position at a $1.50, but still prepared to cut losses if it goes back down to $1.45. So lets say I got my £1.50 price just for this example.
If I got in at $1.50 I would be looking to make 20 to 30 cents on this, but ready to exit my position if the price starts to fade. As it has done very little for the rest of the day I would have exited my position at $1.65ish.
My mentor Timothy Sykes has taught me to play it safe when not much is happening, as this can be a sign of weakness.
I know this is only a hypothetical thesis, but by doing this I am training myself how to trade as though this was a real live trade.
So new lesson learnt is to have support Dip Buy Targets for Longs or Short Trades, as well as the original plan of piggy backing price movement on positive news, earnings winners, big contracts or billionaire plays.
Just remember that if “XYZ” Stock does NOT do what you had planned it would, or does not go to your support target, then you do NOTHING!
So buying stocks at lower prices with solid support levels and positive news in play is a good place to Dip Buy, as the potential reward is higher than the level of risk.
Still be prepared to cut losses quickly if it fades back down.
~Don’t worry about Profits, but know your Risk/Reward Targets~
It will be interesting to see if this stock spikes much over the next few days, but needs some solid buyers to come along. I would be looking to dip buy this stock if I was trading for real…. I soon will be. 🙂
Active Power Inc Pre Market and After Market Close
I plan to write more about dip buying as still learning it myself, but hope to have more examples soon.
Remember I am NOT an expert in this niche, but just someone that wants the ultimate wealth of FREEEEEDOM and I’ve chosen to trade penny stocks to get me there, by learning from a true master that shows you every trade!
Until next time, keep on learning what you want to do until if becomes easy for you…