How to Buy the Dip: Small Account Long Strategy
This is my personal favorite long strategy I used to grow my small trading account trading part-time while working a full time job, and these are the 3 criteria.
Don’t buy these whole dollar breakouts or high of the day breakouts, you hear me saying that all the time. “Buying the dip”, “buying the bounce”, or “longing for the morning panic”; it's all just different names for the same technical trading concept. It’s one of the oldest trading setups in the book... or DVD’s.
That's because this strategy provides you better odds of making money from the trade, and higher risk reward. If you have a small account and you cannot short, or you’re trading part-time while working full-time and only have time the first hour of the open, this would be the perfect strategy for you.
1. Parabolic daily chart pattern
So the first criteria I care about when I'm looking for a stock to dip buy, is the daily chart. And not just any daily chart, I want to see a parabolic daily chart to the upside.
Don’t buy breakouts, especially not on low float penny stocks recently like we’ve seen on SNCA, CETX and CPAH. Too many times these breakouts turn into fake outs. These low floats sometimes will pop for like 10 cents and immediately dump 30-50 cents.
Yes, you definitely could make money buying breakouts, but the risk-reward most times is terrible. To me that's not a consistent strategy, especially when you’re trying to build your small trading account.
I prefer to buy the dips at support level on stocks with a strong parabolic daily chart like CLVS. Now you must be wondering, “okay, how exactly do we find these strong support levels to buy the bounce?”
2. Drawing strong daily support and resistance levels
This brings us to the second criteria. The second criteria to this buy the dip strategy, is to draw support levels from the daily chart. You can’t just buy any support levels, the strongest support, are almost always going to be from the daily chart.
But of course it's only going to work if you were patient, had the support lines drawn out from the daily chart, and you waited for the setup to come to you. There will be days where you miss a morning dip buy area by like 5 or 10 cents here, or the stock will tank a bit lower than you expected. But you will grow to adjust your buy entries and allow yourself more wiggle room once you become comfortable and familiar with the set up.
3. High short interest
Now that we have criteria #1: parabolic daily chart, #2: daily support levels, the next criteria is the icing on the cake. Or as we Asians say it, the Japanese chili spice on ramen. Seriously though, every time I see people put sriracha, that fake spicy sauce, on ramen I get very offended.
I call this third criteria the amazing Japanese chili spice on ramen, because it’s not required for buying the dip on morning panic sell offs, but it's an extra factor that strengthens the setup and makes the setup on a stock even more favorable.
This criteria is high short interest. Remember when we talked about criteria 1 for this setup being the parabolic daily chart? A stock is going parabolic meaning that it's gone straight up for a couple of days with no major pull back. At the same time, whenever there's a stock that's going up and up to the moon, there’s always funds and people trying to short it. Because yes, technically speaking, a chart that looks like this is extended, it should sell off right? It should probably come back down to 8 or 9
But when a heavily shorted stock that “should” come back down to earth, but doesn’t , you bet there are short sellers trapped and in pain for multiple days.
And that's essentially the kind of emotional pain that you as a long trader looking for a quick morning bounce want to take advantage of. You are buying into this morning panic now that the stock is heavily shorted. These short sellers piled on near highs the last few days thinking that the stock will tank, and many of these shorts are probably holding their position overnight as a swing anticipating the stock to go straight back down to single digits.
And how exactly do you check the short %? The best way with the most updated data is on trade ideas. I have the scanner set up to show me the short interest on the morning gap scanners, mid day momentum scanner. And you can also see it in the stock details.
Alternatively you can check the short % details on Finviz and Shortsqueeze.com. Both of these sites are free, but I believe there's some delay. Overall it still gets the job done.
Besides CLVS, another perfect example meeting all the criteria we talked about is RAD. Rite aid. After the stock announced strong earnings and guidance, you can see the stock going parabolic on the daily. If we draw these price levels from the daily chart, you can see they show you areas of support to dip buy for a bounce either in the morning, or intraday. Now are the price levels going to be 100% exact? No, nothing is 100% guaranteed in day trading.
Like I mentioned in this blog, the only thing that will guarantee you profit 100% of the time, is keeping your 9-5 job. But looking at RAD, you can see the stock has a high short interest of 27%. Usually over 20% of short interest is when I consider the stock to be highly shorted, and even better if it's over 50% like CLVS. The reason a high short interest will help you out so much as a long trader looking to buy the morning bounce, is because you know that whoever is shorting heavy on these stocks, will look to buy to cover if they are given any major sell off in the morning. The short sellers buying to cover, and fresh buyers coming in to buy the stock at discounted prices, is the kind of volume that you can take advantage of for a potential upside to retest the highs.
This buying the dip strategy, and the overnight swing strategy is the 2 core strategy I used to build my small account while working a full time job. Again, the key to both of these set ups is patience, and being okay with not trading if the set up isn’t optimal.
Because it's not everyday there will be a stock meeting all three criteria for you to dip buy, and same as the 3 criteria for the overnight swing strategy. If you haven't seen the overnight strategy or my blog on how to trade part time while working a full time job, make sure to check those out.
