How to Buy The Effing Dip (BTFD) The Right Way
The market has been getting a bit rocky lately. The ones especially affected the most are tech stocks. Despite people seemingly blaming the rising bond yield, the correction is somehow expected. My article in November 2020 discussed a survey among fund managers and they showed an inclination to stay away from techs and rotate elsewhere for 2021 — Emerging markets, and bitcoin!
But here I want to talk about something else. This piece is about the noises I’ve been hearing lately from the crowds of investors as the market seemingly keeps crashing day by day.
“Buy the fu*#ing dips,” Folks would say.
Buying the dip, or BTFD, is deemed as a noble act among investors these days. The second noblest act after diamond hands, probably. In short, if you don’t buy those freefalling stocks, you are weak.
Let’s hold our horses for a little bit here.
Have a shopping list
A market correction is like a supermarket having a sale. You intended to buy few groceries, but instead, you end up bringing useless stuff you don’t need.
Why? Because they’re cheap. And when go shopping, you didn’t stick to the list — or didn’t have any list.
If you don’t want to get surprised by how much you spent on junk, always prepare for a list, and stick to it.
Avoid improvised trading.
I usually prepared a watchlist divided into several categories, such as stocks I’d like to add positions, stocks I’d like to buy for the first time, and some other specific watchlists. You must have a list of companies you have been eyeing for so long. That can be a good start.
Tame that storm inside your head
The heat of a correction is always a bad time to buy. You can’t know if it’s the bottom, or that the dip would keep dipping. It’s an emotionally intense situation and we all know what happens when emotions are high. It can be fear or it can be greed.
It clouds our judgment. It steers us toward one bad decision to another.
Buy only when things have calmed a little bit.
Never hit that buy button unless you sense the storm has passed. It’s not just the storm in the market — that’s not easy to predict. But rather, the storm inside your head. Make sure when making a decision, you are calm.
The perfect time to buy is when you sense desperation all around
It’s when you start hearing people say they’re staying away from the market, that’s when you swoop in.
The signal comes in the form of people vowing to leave the market and never come back. You hear curse words when somebody mentioned the market. It’s when doom and gloom fill the atmosphere. There is bad news everywhere. From mainstream media analysts to your friends, everyone is pessimistic.
That’s your cue.
At that point, you will hear less about buying the dip.
Remember what happened last year in March and April 2020?
The despair period usually followed by the skeptical period, when the market starts to creep back up but many people are still skeptical. It’s also the perfect time to buy because at this point, you face less risk than buying at the rock bottom.
Learn some technical analysis
You can’t just buy at a certain price out of a hunch. You need some benchmark or a standard so you can have a clearer picture of your risk and reward. You need to know how to determine good entry points.
This is where you can use technical analysis.
Technical analysis studies price and volume and helps investors forecast future movement. technical analysis is not perfect and just one of the tools among many, but using TA is better than buying things blindly.
One of the easiest TA indicators I often use is the Moving Average, which indicates the average stock prices over a period of time. For example, you can buy a stock which price is close to its 50-days moving average hoping for it to bounce. You can also use the RSI (Relative Strength Index) which shows if a stock is oversold or overbought.
Buy only after you have taken care of the weak stocks
When a big correction happens, you actually have more pressing homework to do.
Let’s be honest, not every name in our portfolio is legit valuable stock. Sometimes we picked something out of other reasons, like speculating, which is not a bad thing to do during a bullish market.
But when you sense a reversal, your priority is to stay safe and to secure your profit/capital before the situation gets worse. You can go on diamond hand on good names and stocks you really believe in. But for those “one night stand” stocks, it’s time to say goodbye.
Get rid of your weak positions. I can think of several examples such as no-product no-revenue SPACs, shitcoins (If we’re referring to the crypto market). It also means you can also start trimming some of those overvalued stocks.
That would save your money, while at the same time provide capital for when you buy the dip.
Disclaimer: This article is for educational and informational purposes only, not professional investment advice.