What Is Buy Weakness?

Buy weakness is a proactive trading strategy where a trader enters into long positions ahead of the anticipated reversal in a security's price. This strategy is derived from the basic concept of buy low, sell high, and may also be referred to as buy a retracement or buy at support.

Key Takeaways

  • Buy weakness is a proactive trading strategy where a trader enters into long positions ahead of the anticipated reversal in a security's price.
  • Buy weakness traders will generally either go long a security or buy call options in a preemptive move to capture the entire expected upside.
  • A common method to spot a buy weakness signal is through the use of trading channels, which can be in the form of either short-term trend channels or long-term envelope channels.

Understanding Buy Weakness

Buy weakness trades focus on identifying a stock whose price decline is overdone. Once identified, the trader begins to accumulate positions to profit from potential gains once that stock's price rebounds. Traders will generally either go long a security or buy call options in a preemptive move to capture the entire expected upside.

Buy weakness and the opposite "selling into strength" tactic are two strategies derived from the basic concept of buy low, sell high, and are often identified from following a trading channel.

Trading Channels

One of the most popular ways to spot a buy weakness signal is through the use of trading channels, which can be in the form of either short-term trend channels or long-term envelope channels.

  • Trend Channels: Trend channels are short-term channels drawn in the direction of a particular trend. They can be ascending if a trend is bullish, descending if a trend is bearish, or sideways if a trend is flat. Trend channels infer basic sell at resistance and buy at support methodologies, which are ideal for identifying buy weakness trades. However, they can be slightly higher risk since they do not encompass full trading cycles through reversals and assume that a price will remain on trend within its upper and lower bands.
  • Envelope Channels: Envelope channels can be even more reliable for identifying buy weakness signs since they create an extended dynamic channel that identifies a security’s trending range over a longer term. Envelope channels draw upper resistance lines and lower support lines to help an investor identify the range of prices a stock price is likely to trade within. There are several types of envelope channels a trader can use to identify buy signals, with Bollinger Bands® being one of the most popular channels for identifying standard buy weakness signals. These channels create two zones above and below a midpoint moving average to help traders identify resistance and support levels.

With trading channels, it can be easy to detect when a stock has reached a buying trough. These price points are at or near a pricing channel's support trendline. Once reaching support, the security is expected to have a low probability of falling lower. Thus, traders jump in to take trading positions that will benefit from rising prices.

Buying the security at its support market price and allowing it to rise to a specified level is one way to benefit in a buy weakness trade. Traders can also buy call options. The call option can be executed at any time up until expiration. For example, the owner of an in the money (ITM) call option can exercise their option, then immediately sell the security on the open market to generate an instantaneous profit.