Buying at the dip vs Buying at the breakout
- Thread starter fishduck
- Start date
Jason1
Well-Known Member
Yer if you manage to find some PM thats well under spot at that time. lol
Patience and buying on dips is better than succumbing to FOMO and buying high. when prices break out, its usually a good time to save for the next dip. I set a spot price level where I stop buying, once it reaches that Level I stop buying, and wait for the retraction.
price averaging and keeping it low as possible is very important IMO
If you use YouTube at all, search for user belangp. He has a number of videos on this topic. Most interestingly he compares buying "on the dip" Vs buying a set amount regularly showing that the upside to timing your buys (on the dip but imagine would be similar results for break out) is only half a percent or so more than regular buying, but the downside could be as much as 5 percent. I used to try and buy on the dip but there are many factors that make it difficult. The easiest and safest way is making regularly buys of a set amount. Of course if I found myself in the middle of a bull run I would probably hold off and park the cash elsewhere if it was time for a gold buy.
While we’re currently at all time highs in $AUD gold, I’m still buying regularly. Four main reasons...
* I think we have quite a long way to go before the price comes down significantly (more than 10%). It hurts to be buying at the moment, but I think these prices will look cheap in a couple of years from now and I don’t want to miss the boat.
* Dollar cost averaging. I’m still averaging well under $1900/oz cost on my gold stack, even though I’m buying nearly weekly at the moment. I can afford quite a bit more of a runup before it starts to get to my cost average limit.
* My gold/silver ratio is stupidly high in favour of silver.
* Before I started stacking, I was horrible with money. As soon as it went in, out it went again wasted on absolute nonsense. Stacking has been an amazing way for me to save my money, especially since I’m looking to time my first home purchase for when the real estate market eventually has its correction. The more I save now, and not try to keep up with the Joneses, the more I can acquire later
* I think we have quite a long way to go before the price comes down significantly (more than 10%). It hurts to be buying at the moment, but I think these prices will look cheap in a couple of years from now and I don’t want to miss the boat.
* Dollar cost averaging. I’m still averaging well under $1900/oz cost on my gold stack, even though I’m buying nearly weekly at the moment. I can afford quite a bit more of a runup before it starts to get to my cost average limit.
* My gold/silver ratio is stupidly high in favour of silver.
* Before I started stacking, I was horrible with money. As soon as it went in, out it went again wasted on absolute nonsense. Stacking has been an amazing way for me to save my money, especially since I’m looking to time my first home purchase for when the real estate market eventually has its correction. The more I save now, and not try to keep up with the Joneses, the more I can acquire later
1. Risk:reward is way better for buying on breakouts.
2. Dollar-cost-averaging is statistically a poor way of investing, and a mugs game.
Hey there, thanks for the feedback.
Would you be able to elaborate further how the risk/reward is better at breakouts (as I'm genuinely interested either from a technical or psychological perspective)?
Also, I would like to understand why you think dollar cost averaging (DCA) is not a good strategy.
Using stocks as an example, reading the first chapters of the Intelligent Investor by Benjamin Graham suggests dollar cost averaging as a sound investment strategy to build your position over time long term and Warren Buffett would probably espouse the virtues of DCA as he is viewed as someone who holds investments long term, ideally forever.
The strategy in investing in PMs is no different, most people here are not into this to flip or time an exit point but many of them are looking to hold on to these long term as a foundational part of their portfolio.
Once again, this is not to say that the likes of Warren Buffett are not without its flaws or that we should agree to what they say and should do as they say and I'm not agreeing or disagreeing with your points but I was hoping to get some more insight to expand my knowledge base and listen to different ideas.
Many Thanks
Sure.
Buying the breakout is buying into the confirmation of an upward price movement. Your opinion (or assumptions) have been confirmed by price movement, direction and momentum. The breakout level also gives a clear reference point or price level, which if broken to the downside, tells you clearly that you were wrong. With these parameters all in place, and combined with good risk management strategy, there a fair probability that you can garner a profit from the trade or position, giving you a favourable risk:reward.
Buying the dip is counterintuitive to the parameters set in place above. Firstly, you are trading against price movement and/or trend, so you are going into the trade assuming you are right and the market is wrong. This is a fundamental flaw in trading psychology which can be costly.
Secondly, you have no reference point on which to base your risk management strategy, which is another classic failing that often causes trading accounts to blow up. In this case, your risk:reward strategy has to be inferior, because you can't even quantify it. If you can't risk-manage each trade, then you can't achieve the most important aspect of profitable trading - positive expectancy.
As for dollar-cost-averaging, see here where I have explained this previously: https://www.silverstackers.com/forums/index.php?threads/dollar-cost-averaging.38948/#post-518674
Your explanation is interesting as I would say "buying the dip" would realistically require you to have a clear breakout to indicate a price movement back up. Perhaps stackers conflate the two terms? It is definitely counter intuitive to buy on the downward price movement without a relative reference point. Thanks for sharing.Sure.
Buying the breakout is buying into the confirmation of an upward price movement. Your opinion (or assumptions) have been confirmed by price movement, direction and momentum. The breakout level also gives a clear reference point or price level, which if broken to the downside, tells you clearly that you were wrong. With these parameters all in place, and combined with good risk management strategy, there a fair probability that you can garner a profit from the trade or position, giving you a favourable risk:reward.
Buying the dip is counterintuitive to the parameters set in place above. Firstly, you are trading against price movement and/or trend, so you are going into the trade assuming you are right and the market is wrong. This is a fundamental flaw in trading psychology which can be costly.
Secondly, you have no reference point on which to base your risk management strategy, which is another classic failing that often causes trading accounts to blow up. In this case, your risk:reward strategy has to be inferior, because you can't even quantify it. If you can't risk-manage each trade, then you can't achieve the most important aspect of profitable trading - positive expectancy.
As for dollar-cost-averaging, see here where I have explained this previously: https://www.silverstackers.com/forums/index.php?threads/dollar-cost-averaging.38948/#post-518674
Jason1
Well-Known Member
that strategy above is only good if you think you can predict the top end and sell at the right moment quickly so likely suits those messing around with paper gold who can sell at any time.
Its much easier to work out below average prices than it is to work out the peak of a pump that usually dies as quick as it rises leaving you with an expensive stack.
thats a high risk type strategy less likely suited for a long term stacker.
Im sure the poster above has a good idea the dollar average of his stack even, if not he would have no idea if he is making a profit or loss.
unless he buys and sells the entire lump of silver or gold as one transaction and do so very quickly, which only in that case does it not matter what the average cost is as he isnt holding it long enough.
so both have their place, but both suitable respectively for two different types of trading. Eg long term Holding or short term trading, the above poster is painting two different styles of traders with the same strategy, So thats a bit misleading.
Its much easier to work out below average prices than it is to work out the peak of a pump that usually dies as quick as it rises leaving you with an expensive stack.
thats a high risk type strategy less likely suited for a long term stacker.
Im sure the poster above has a good idea the dollar average of his stack even, if not he would have no idea if he is making a profit or loss.
unless he buys and sells the entire lump of silver or gold as one transaction and do so very quickly, which only in that case does it not matter what the average cost is as he isnt holding it long enough.
so both have their place, but both suitable respectively for two different types of trading. Eg long term Holding or short term trading, the above poster is painting two different styles of traders with the same strategy, So thats a bit misleading.
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What wrcmad said is correct but requires skill to execute correctly. For the less skillful and more emotion buyer like myself, it's better to do some DCA for the psychological benefits and at the same time I also do "buying on breakout" as I did with gold in January and also in July 2019. I also DCA to overcome my procrastinating habit - making regular buys somehow helps in this respect.
By the way, I intend to use the "DCA strategy" on the selling also - selling incrementally once I sense a peak is near.
By the way, I intend to use the "DCA strategy" on the selling also - selling incrementally once I sense a peak is near.
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Statistically, buying a "pullback" is a good strategy - buying a "dip" not.
Maybe these two terms have been conflated?
The OP asked for a case for buying a breakout - that is all I was responding to. You are correct that it is probably more suited to traders, but over the long-term it is still statistically a better strategy to use to accumulate in terms of risk.
As for DCA, it is still a statistical dog as I have pointed out, unless you are only able to fund your purchase incrementally akin to a savings plan - in this case you don't have much choice, but it doesn't make the strategy good, it merely makes it "better than nothing".
Jason1
Well-Known Member
Yer you were out of the hole you dug your self until your last paragraph, and then you continued and put your self back in it again.
The simple answer and correct answer would have been.
They are two different strategies used for two different styles of trading. both have merits to their perspective styles of trading.
Neither would work on the other style of trading.
Considering this is a stacking forum one would assume he is talking about holding long term and adding to his stack over many years.
other wise your now just confusing the OP.
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I didn't see the hole in either post?
I didn't assume anything, especially with the OP referring to breakouts.
I'm guessing you didn't read my previous post on DCA?