Buy Weakness

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.

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.

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.