When I talk to the ex-bank traders I work with, they will often refer to the market being in “buy the dip” or “sell the rally” mode.
This is an old timey bank trader way of describing the current market type.
But if the market is in one of these modes, how do you actually “buy the dip” or “sell the rally”?
There are a few methods you can choose.
First, a little bit of context.
Do your big picture analysis first
If you apply these methods to any old currency pair at any old time, your performance will be inconsistent at best.
I know. I spent ages trying to buy dips and sell rallies without considering the market type and ignoring the fundamentals. It was a great way to get my account chopped to bits.
Instead, it’s better to establish a macro view and determine the market type as either bullish or bearish, and have conviction that the currency is going to go a certain direction.
For example, you might believe that the USDCAD is going to rocket higher because the Canadian economy is affected by a troubled oil industry, and a very bubbly housing market.
You would then wait for the daily chart to commence an uptrend. Only then do you look to buy dips. If you are extra good, you will wait for a fundamental catalyst to have triggered the move – further increasing the probability that your “buy the pull-back strategy” will be a winner.
Once you have a strong view about a trade like this, you can use these techniques to get in on some nice trends.
Pick a retracement level
One way to buy a dip (or sell a rally) is to pick a price that you would like the move to retrace to before you enter. This could be a big figure number, a previous support or resistance level, or a percentage retracement such as a fib level.
For some traders, it might simply be a level they are happy to own the currency pair at. Once the price hits that level, they simply enter the trade. Often, this would be done using a limit order.
The disadvantage of this method is that sometime the retracement will end up being much deeper than your level and you will get stopped out.
Pick your moving average speed
A moving average crossover is a good way to enter on a retracement. You wait for moving average to cross against the trend, and then when it crosses again in the direction of the trend you enter.
You can adjust your moving average to the velocity of the trend you are in. If it is a slow moving trend, you would have a longer set of moving averages. If the trend is fast, you will need a shorter set of moving averages – otherwise you might not get any pullback.
In addition, going down to a lower time-frame chart and looking for a moving average cross can help too. Finally, if you offset the moving averages slightly, it can be helpful too.
Here is a shorter term moving average set:
And a longer term one:
This method works well as you are buying with a bit of momentum in your favour, which is helpful in indicating if and when the sell-off has exhausted itself. The disadvantage compared to picking a level is that often you will get in a little bit later than if you had picked a good level.
Perhaps this is the simpler option, whereas picking a level will suit more experienced traders.
My favourite: Candlesticks
My favoured method of buying dips and selling rallies is candle sticks.
Simply wait for a pullback, and then an engulfing or pin candle in the direction of your trade, and enter on the close of the candle.
The reason I like candlesticks is that they tend to let you get onto a move a little earlier than a moving average, and there is often some momentum behind them. They also work if the trend is slow, steady or strong.
In addition they can be applied across a variety of timeframes, meaning I can keep my charting set-up simple (I don’t need to adjust my charts when I switch timeframes).
What about you?
What strategies do you use to “buy a dip” or “sell a rally”?
If you have a method that works well for you, share it below so other traders can benefit from your knowledge.
Cheers,
Sam
P.s. We have competition on to win $500 in Forex tools at the moment.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is a co-owner of Forex Signal Provider FX Renew (Get a FREE 30-day trial). If you like Sam’s writing you can subscribe to his newsletter.
View further posts from Sam in the FX Insights section
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