Finding the right entry point to buy stocks after a pull back

Question

I have made mistakes of buying stocks in a day or two when the stocks do a pull back. Then it drops further, and I stay in a 20-30% loss for some weeks or months.

Is it normal that type of bad decision every investor or trader experiment? Should an investor expect that the volatility to the negative side is expected for any stock?
Is there some strategy that I should use before buying a stock that had a pullback due to bad news like looking at any indicator or waiting for a few days?

why did you make the purchases you did? was it because they price was dropping or was there some other reason? — mhoran_psprep, Dec 27 '21 at 13:16
I normally buy when there is pullback which has benefitted me for some stocks, but not for all. Majority of the stocks will come back after a long duration like weeks or months, so I'll have to wait until then. I never do a stop loss. — wonderful world, Dec 27 '21 at 15:31
If you consider a few weeks or months as a long time, you're speculating, not investing. — chepner, Dec 27 '21 at 22:31
Does this answer your question? Can you explain why it's better to invest now rather than waiting for the market to dip? — shoover, Dec 28 '21 at 21:31

score 2 · Answer 1 · answered Dec 27 '21 at 17:10

Knowing what the lowest price will be after share price drops requires knowing the future and no one possesses that ability. There's also no way to know how much volatility there will be.

If you're an investor, then you are in it for the long haul and you accept the fact that price will gyrate.

An alternative is to hedge your positions but that comes at a cost which is out of pocket and/or opportunity cost.

score 1 · Answer 2 · answered Dec 29 '21 at 04:03

I agree that no one can predict the future. However, we can make better decisions if we know probabilities.

For example, if you really research a stock you can find out that maybe it never dips more than 25% in a year in a bull market. And maybe the average dip is 15%. In which case if you see it dip 15%, then buying it after a 20% dip means you're likely to make money if you hold it one year.

So knowing certain stats like that can help you make better decisions on when to buy.

Another thing you can do is look at support and resistance lines and fibonacci retracements. If you know it dropped to support, then there is some probability it could bounce off of it. There are other things to consider, but, that's just a generalization.

Or maybe the fibonacci retracement is never more than the golden pocket of 61.8%. And so if it drops to there and you buy, you have a good chance it's going to go up soon.

You can also look at moving averages and buy when a stock is well below key moving averages.

Finally, I like to look at the oscillators like the CCI and the RSI. If you see both of those at the bottom, then again, you have a good chance it's at or close to a bottom. It can keep going lower, but, again, it helps. It reduces the probability that you're buying at a top.

So, if you're a long term investor, using some of these indicators can help you make a good timed purchase and it could definitely help you increase your returns over the long run vs not looking at these at all when buying.

Just a warning that if you start looking at these too much, it gets addictive and you may have a hard time being a long term investor :) So, don't look at these too much unless you want to trade vs invest.

I don't look at any of these indicators because I could not find an easy usable website. I buy when there is a pullback due to some bad news. Do you recommend any paid or free website which can alert me stocks based on these attributes? — wonderful world, Dec 30 '21 at 02:05
Another warning: Technical analysis of stocks is somewhat controversial as to whether it is actually useful. You will see in broker disclosures "Past performance is not an indicator of future returns", technical. analysis like this assumes that is not true. — JohnFx, Dec 30 '21 at 17:57

Finding the right entry point to buy stocks after a pull back

2 Answers2