Buy the Dip!
If you have been anywhere on the internet where stock traders congregate you have seen the phrase “Buy The Dip” (BTD). When the market is raging higher and “the dip” is one or two bear candles before another new all-time high is made, it’s easy to buy the dip, it’s so easy. We tell ourselves we hope it dips more, we hope we can get filled on a 25% or 30% or even 50% pullback. We might even take a loan out against our house and sell our car if it ever gets to those levels again! But when that fateful day comes, when the stocks we have been watching for several months, hoping and praying for them to dip, actually dip, we panic. We assume the market top is in. We assume the market and our portfolio are going to zero. Our brains tell us it will never stop dipping and the world is coming to an end. We turn on the news and justify our doomsday outlook with the clickbait headlines spinning any news into bad news.
The stock we wanted to buy is at the place we wanted to buy it. Our plan says to buy. The history of the market and our charts say to buy it. But our fear says to stay in bed and cry. After all our account is down big and this will be the time the market doesn’t recover right? Is any of this sounding familiar? If not, you rock and have fun being a billionaire on your yacht. If it is sounding familiar, know that this thought process is perfectly normal. It is so easy to buy when things are high hoping they will go higher. We have our “conformation” then. It is much harder buying when your account is blood red. Baron Rothschild, an 19th century British nobleman said, “Buy when there is blood in the streets even if the blood is your own.” Now, I am pretty sure he was not talking about actual blood, but in the 1800’s you never really know. Either way, the point still stands to this day. When stocks correct, fear is high and panic is at the disco, that is the best time to buy. The question is how do we overcome the fear of buying on down days and in down markets?
Here are a few things you can start doing today:
1. Acknowledge - The first thing to do is simply to know that it will be scary buying the dip. Your account will be red, and probably will get even more red. Just this acknowledgment can help us overcome the fear.
2. Patience - It will take some time to get back to green. We never call the exact bottom. When you are buying bigger dips and holding, you will be trading with a longer time horizon. We are using position trades and investments which take time to play out but can give us incredible gains over months and years.
3. Pyramid - Set up pyramid limit buys to get into your positions. Do not get into your position all at once. This will help you get a better average price if the stock continues lower. It will also help you fear the dip less because you will want the lower pyramid orders to fill.
4. Plan - Formulating a written plan to follow is critical to your success in the market. A plan will keep you from acting out of emotion or fear. However, you have to be willing to follow the plan and stay disciplined to it. Remember that a perfect plan imperfectly implemented will give inconsistent results.
5. Protect - Know how to protect the downside. You want to always know your risk and be able to protect your capital. Even with the most conservative pyramid, the stock can continue lower after your final leg. Know where and how you will hedge before you submit any limit buy orders.
6. Backtrade - Backtrade the biggest crashes in history so that you know what if feels like to buy when everything is falling off of a cliff. You will find yourself more than happy to buy on those drops because as much as you try to put yourself in the moment and forget that you know the future, you know that it goes higher, so much higher. Use that history as your guide to tell you that this dip is no different and that the markets will go back up if you give them enough time.
7. Live - If it causes you anxiety to look at your charts and your account when stocks are dropping and you are getting filled on your pyramid orders, then don’t. Have your protection alerts set up, have all of your limit buys in and go about the rest of your life. Live your life to the fullest and make your money work for you.
There you have it team, 7 practical steps to become a better "buy the dipper"
and to help you overcome your fears. And if those don’t work for you, you can always lay in bed reading BTFD memes and try again tomorrow.