Buying the dip: Managing the trade
How to buy stocks on the way down.
CIBC Investor’s Edge
Oct. 28, 2025
9-minute read
In this article, we discuss buying big dips in stocks. A recent example of this was the tech crash of 2022, when many large U.S. stocks were down 30%, 40% or even 50% on the year. Buying big dips is not easy to do in the heat of the moment. Whether you're a seasoned investor or just starting out, having a trading plan to buy the dip can help you invest calmly and confidently, even while prices are all over the place. Sounds good? Let's get dipping.
Buying the dip is not something that works for all stocks, or all investors.
Stocks
Look for companies that are likely to stick around for the medium to long term — like those in growing industries, with a strong customer base and solid management. Also look for companies that can handle the short term — think healthy cash flow and not too much debt.
Investors
Investors who are successful at buying the dip aren’t just reacting to price or chasing stocks at 52-week lows. They usually have a watchlist, filled with companies they’ve researched and feel good about. When prices drop, they’re ready to buy with confidence.
Now let's get to the main point of this article — a trading plan to buy the dip. A trading plan can involve setting price targets for a stock — targets that align with your goals and risk tolerance and that make sense for the stock you're considering. Think of this as a flexible framework you can adapt to your situation, not a precise plan.
Here's a simple example of a trading plan. You found a stock at $100, started paying attention when it dropped to $80 and then you bought it in three stages when it hit $70, $60 and $50. Let's explore this trading plan:
Initial price = $100
In this example, the initial price is $100. This could be the purchase price of a stock you already own, or it could be the price of a stock when you added it to your watchlist.
Alert price = $80
In this example, the alert price is $80, which is 20% down from the initial price. The drop is big enough to get your attention but not enough to take action right away. This is a good time to update your research or make sure you have funds ready.
Buy zone = $70 to $50
The buy zone is where you intend to buy. In this example, the buy zone ranges from $70 to $50, a drop of 30% to 50% from the initial price. Since it’s tough to know where the bottom will be, buying in several stages can help you "average down" on a falling price.
Reversal
Reversal is when you might consider buying the rest of your position, if the stock price starts rising.
Invalidation
Invalidation is when the trade doesn't work out as planned. Maybe a loss becomes too large or a gain takes too long.
Let's explore reversal and invalidation in more detail, since these can be useful techniques to help you manage the trade.
You found a stock at $100, started paying attention when it dropped to $80 and then bought in three stages when the stock hit $70, $60 and $50. Sounds simple enough, right? Stocks don't always move in a straight line, though. That's where the reversal price comes in. You set a reversal price above your most recent buy price, allowing you to consider buying the rest of the position if the price starts moving up. Here's how reversal works:
[Note: In the example below, we assume a plan to buy the stock in three stages, investing an equal dollar amount at each price level.]
| Buy order |
Buy price |
Reversal price |
| 1 |
$70 |
$80 |
| 2 |
$60 |
$70 |
| 3 |
$50 |
|
- After buy 1 at $70, the reversal price is $80 — the price where you'd consider entering buys 2 and 3
- After buy 2 at $60, the reversal price is $70 — the price where you'd consider entering buy 3
- The reversal price moves down with the stock price. The reversal price is $80 after buy 1 and $70 after buy 2
- Reversal prices should allow room for the stock to fluctuate. This is important, since stock prices tend to be particularly volatile during a large down move.
Here are some different ways reversal prices could play out:
[Note: In all scenarios below, we assume a plan to buy the stock in three stages, investing an equal dollar amount at each price level.]
| Buy 1 |
Buy 2 |
Buy 3 |
Average buy |
| $70 |
$60 |
$50 |
$60 |
This is the simplest scenario, where price declines smoothly and the investor buys at each price level. As a result, the investor buys 1/3 of their position at each price level, for an average buy price of $60.
Scenario 2: Reversal after buy 1
| Buy 1 |
Buy 2-3 |
Average buy |
| $70 |
$80 |
$76.67 |
Here the investor wasn't so lucky. They got buy 1 at the target price of $70. Then the price took off and they decided to buy the rest of the position — buys 2 and 3 — at the reversal price of $80. As a result, the investor buys 1/3 of their position at $70 and 2/3 of their position at $80, for an average buy price of $76.67.
Scenario 3: Reversal after buy 2
| Buy 1 |
Buy 2 |
Buy 3 |
Average buy |
| $70 |
$60 |
$70 |
$66.67 |
Here the investor was a bit more lucky. They got buy 1 at the target price of $70 and buy 2 at the target price of $60. Then the price took off and they decided to buy the rest of the position — buy 3 — at the reversal price of $70. As a result, the investor buys 1/3 of their position at $70, 1/3 at $60 and 1/3 at $70, for an average buy price of $66.67.
A final twist on reversal prices is to react quickly to down moves (hitting the buy price), but slowly to up moves (hitting the reversal price):
- Down moves towards the buy price are obviously good when buying the dip, therefore investors may wish to buy immediately when the stock price hits the buy price
- Up moves towards the reversal price are not so good, therefore investors may not wish to buy immediately when the stock price hits the reversal price. This aims to reduce the chance of buying on a short-term gain that doesn't last.
Here’s an example of how you can confirm an uptrend:
- Wait for two consecutive daily closes above the reversal price, followed by a midday price above the reversal price.
- If the trend does not continue, either at the daily close on day 2 or the midday price on day 3, then the process resets and starts again.
- We suggest a midday price for the final signal, because it can be difficult to buy near the close and also because prices are typically more stable over the noon hour.
- Selecting the type of close — such as daily or weekly — and the number of closes depends on your goals and the stock you're considering.
When entering a trade, it's good practice to think how it might go wrong or become invalidated. This can help to manage risk and protect profits. Below are two examples of how a plan to buy the dip can become invalidated:
Price-based invalidation: Loss becomes too large
Say you bought in scenario 1, at an average buy price of $60. Maybe you'd be concerned if the price kept falling, say to $40. You could manage this risk by buying a long put option, struck at this "pain price" of $40 and with enough time to expiry to give the stock some room to recover. You could also set a stop-loss order, although this runs the risk of being triggered on a sharp dip before the stock has a chance to rally.
Time-based invalidation: Gain takes too long
Let’s assume again you bought in scenario 1, at an average buy price of $60. But this time, you expect the stock to rally to $100 within two years. Now it's getting close to the two-year mark and the stock is at $80. That's a solid gain but not as much as you expected. At this point, you could "cut your gains" and move on. There's an opportunity cost in waiting too long for a trade to play out, even when it's in profit.
Think about invalidation before you enter the first buy. Planning for price-based invalidation can give you the confidence to buy as the price keeps falling, as you know what to do if the price falls even further than you expect. Planning for time-based invalidation can help you remain objective about how the trade is performing.
- In this article, we discuss an example of a trading plan to buy dips in stocks. When creating a trading plan, check that it aligns with your goals, risk tolerance and the stocks you're considering. Our example of a trading plan, which you can adapt to your situation, includes an initial price, alert price, buy zone, reversal and invalidation.
- Initial price is the purchase price of a stock that you already own or the price of a stock when you add it to your watchlist.
- Alert price is where a stock falls enough to get your attention but not enough to start buying
- Buy zone is where you buy the stock, likely in several stages rather than all at once. This can help you "average down", if the price drops.
- Reversal is where you decide whether to buy the rest of the position, if the price starts moving up
- Invalidation is where you decide the trade has not worked out. An example of price-based invalidation is when a loss becomes too large, while an example of time-based invalidation is when a gain takes too long. To stay in control, think about how a trade could become invalidated, before you enter your first buy.
This article is about how to buy the dip — specifically, how to manage the trade. Want to know more? Check out How to know when buying the dip is a wise move. We discuss why and when investors might consider buying the dip, with examples from two well-known companies, including a deeper dive into fundamental analysis. Together, these articles provide insight about when and how to buy the dip in stocks.
