Buying a bounce a strategy designed to purchase a stock at an advantageous price when a temporary retracement occurs in the stock that is in an overall uptrend and that one expects to move higher in price.
No stock price (not even Apple) ever just goes straight up forever, with no downside corrections. Temporary downturns in stock price afford investors the opportunity to purchase the stock if they do not already own shares in it, or to acquire additional shares. Have a good strategy in place to take advantage of such a situation.
Buying a Bounce off of Support
If a stock has retraced two or three times to about $45 a share and then moved higher, then that $45 price level is an established level of support for the stock. An investor could enter limit orders to buy the stock near $45 a share if and when the stock again retraces to around that price, expecting it to once again bounce off that support level. Stop-loss orders could reasonably be placed a bit below the lowest price the stock has fallen to on prior pullbacks to around the $45 level.
Buying a Bounce off a Trendline
When a stock has been in a prolonged overall uptrend, a basic trendline (drawn connecting the lows on pullbacks in the stock's price) can be drawn that shows support for the overall trend. Then, when a stock appears to be making another downside correction, an investor can place buy orders near the price level where the trendline lies moving forward on the assumption that corrective moves in the stock's price do not significantly violate the existing trendline.
Buying a Bounce off of a Moving Average
Another area to look for a stock price to bounce off of is a moving average. To select an appropriate moving average to work from, an investor looks at a chart of the stock with moving averages to see which one has been consistently successful in supporting the stock price.
If, for example, the stock's price can be seen to have previously often retraced to and then bounced back up from the 20-day moving average, then that is a reasonable spot for placing buy orders, with stop-loss orders allowing for slight penetrations below that level.
It can help to also identify a specific price near the moving average level which has previously provided support. If the 20-day moving average lies at $21 a share, and $20 a share is a previous support level, then an investor may wish to place buy orders closer to $20.
Buying a Bounce on a New High
Since bounce strategies are based on the assumption that the stock will move higher in price again, very conservative investors may wait to buy the stock at a new high price above the price it retraced from, with a stop-loss below the low of the retracement.