Yes, this is a rip off from the law of diffusion of technology innovation by Simon Sinek. What I want to explain to you is how on buying the dip and longing consolidation then longing the top, there's a process and how it affects the prices. The law of diffusion of innovation is the law that I understand well and I find its extremely suitable to explain in the financial market.
So in context, I want to separate class of traders in terms of buying opportunity and risk management.
- Early adopters = Dip Buyers
- Early Majority = Bullish Reversal Buyers
- Late Majority = Buying Resistance
- Laggards = Asshole who never believed, only in for shorting
There's nothing particularly wrong with these stages, I believe its a matter of risk management and safety preferences. However I believe the proportion is right, with the people who buy the dip is particularly less than the early majority and late majority, that's why dip buyers will enjoy the highest percentage of profit and is actually the safest in the long run as they entry in the cheapest price rather than the early majority and the late majority that enter at a much higher price and the group of people that actually drove the price up.
Early Adopters
As the name suggests its so small number of them as buying the dip, mainly due to fear and failure on identifying market bottom. As a the first time experience might resolved in buying the dip but it keeps dipping more. The context here is to understand dip buyers have a strong belief that whatever the dip that they bought, they are patient enough to wait it in the long run, they know the range of the usual price of the asset and believe the dip is where the area is underbought, so they– bought the dip.
Lets take a look at these relatable dip buying memes before we move on
Study Case
Dip is measured from a steep sudden fall, on this ADA case, it's due to BTC massive immediate dip from a massive amount of FUD and a drop in hash rate, well that fundamental problem is a story for another day, this article is to make you understand what you should do when a dip occurs and how to identify it. As you can see on the chart above, ADA is well maintained on the 1.1607 support and is consolidating peacefully, then making a run, to 1.5 area and consolidate on resistance for a while, problem first arise when ADA is consistently making lower highs.
ADA is notoriously bad on handling bearish descending triangle as well, so as you can see on the one hour chart, the dip is very steep and pierces below the past strong resistance at 1.16, that's how you can tell that fall is abrupt and abnormal. Buying the dip there could work, afterwards as you can see ADA started to gain some traction but fails on maintaining a higher highs, making lower highs instead, yet again another bearish sign. More unfortunate enough on 23 April the next dip is also due to BTC sudden rejection and dipping. This one is more brutal as it fall on two level of support, which is 1.03 and 0.93. Ok, I know you must've asking for the most important question now, how do I identify the support to ultimately decide how deep is the dip and where to correctly buy it.
Generally, identifying a good support is derived from a good past resistance, as you can see on the chart above, the past strong support was 0.9386. That's how the early adopters find their way to buy the dip and to find the potential lowest point to buy as reversal. I'll show you more example to further prove my point
BTT past resistance at 0.0042 has turned into a 82% increase sprung from the dip.
BCH past resistance at 690 has turned into a bouncing ground from the dip.
THETA past consolidating channel with 7.39 being resistance has turned into an amazingly accurate reversal point for THETA and the past support at 9.96 has turned into a strong resistance.
Below is a close up example from HOT how it past resistance with multiple rejections come back to be a strong support.
Alright, beautiful examples right. Now let's move on on the next section
Early Majority and Late Majority
Early majority is the type of people that waits on the sign of a bullish reversal,
So on the exponential moving average ribbon, you can see on how the bearish waves take some time and it's particularly hard to drive the price up because there is so less of dip buyers. You can see this process repeats over and over and over again throughout the market.
The problem on buying the dip because its actually has the most probability of being wrong, for the early majority they enter when the asset has shown a strong bullish reversal and its time to for another leg up, they are pretty soon relative to the late majority. The late majority is the majority of the people that went late to get in but still want the price either way. So as more people come on and be euphoric and the fear and greed index becomes more and more greedy, the more price will rally and a correction is inevitable to happen. Correction is when the price dips on a certain level and the whole process repeats again.
Conclusion
On choosing to be a dip buyers, early majority, or late majority is based on your risk preference and how sure you are. It's nothing shameful on being a late majority as long as you still profit. I cover on why even buying at resistance could be profitable if done right on this article. Feel free to read and educate yourself more.
Best Regards,
Rafi Amjadrasyid