What is Buy Weakness
Buy weakness is a proactive trading strategy in which a trader generates profits from buying into a security that has reached a low level. Traders will generally either go long on a stock or enter into call options that bet on a rising price. A buy weakness strategy is the opposite of a "selling into strength" strategy.
BREAKING DOWN Buy Weakness
Buy weakness signals are often identified from following a trading channel. Trading channels may be either trend channels or envelope channels. Buy weakness trades focus on identifying a stock’s low point in order to profit from potential gains. Buying weakness and selling strength are two strategies derived from the basic concept of buy low, sell high. Buying weakness may also be referred to as buy a bounce or buy at support.
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 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. Trend channel signals can tend to 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 such as Bollinger Bands can be even more reliable for identifying buy weakness signs since they create an extended channel that identifies a security’s trending ranging 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 show. There are several types of envelope channels a trader can use to identify buy signals. Bollinger Bands are one of the most popular channels for identifying standard buy weakness signals. These channels create two trendlines above and below a midpoint moving average trendline 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 channels support trendline. Once reaching the support trendline 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 immediate profits an owner of an in the money call option can exercise their option, then immediately sell the security on the open market to generate an immediate profit.