Should You Keep Buying The Dip | Podcast Episode #8

0:07
Learn to trade stocks successfully. Learn to profit consistently. I’m Ryan Mallory, and on my weekly podcast, I’m going to teach you the ins and outs of a complex, ever-changing stock market. You will learn to trade better, trade smarter, and profit bigger.

0:26
Now, let’s go trade. Hey, all you traders, this is Ryan Mallory, and I’m glad to be doing the 8th episode on my podcast channel. And today it is going to be about should you buy the dip.

0:44
Now, I would also encourage you to go back, listen to the old podcasts that I’ve done so far and do, do the one that I did last week, and it was about. How to trade with market bubbles and it’s probably even more relevant this week than it was last week because this market just keeps going up, up, up, up, up, and there’s no pullbacks ever and when the market isn’t going up, it’s just going sideways.

1:09
So I would definitely encourage you to. Check out my previous episode. Give it a good listen, see how it can apply to your trading, your trading methods, your trading style, and how you can preserve the profits that you currently have in this market in order to make sure that when there is a big selloff or any kind of a sell-off that you’re walking away with a large majority of your profits and not just giving them back to the market.

1:39
So let’s get on to this episode, shall we? The question That I want to pose to you is whether buying the dip. It’s a good thing now. If you’re not familiar with the whole concept, just by the dip or just by the bleeping dip BTD, BTFD, depending on how.

2:04
Expressive, you want to get with that um particular acronym. Uh, by the dip is a popular concept in trading today. It is essentially. If the market goes down, you buy the dip, you buy it every time you do it.

2:21
Unwaveringly, OK, and if you look on Twitter, if you look at. Social media at all where there’s traders posting their ideas. I post my ideas, so there’s nothing wrong with that, but there’s a lot of people I saw a 17 year old kid or he looked like he was a seventeen-year-old, he definitely, uh, looked pretty wet behind the ears still, but he, he, he, he said, and I quote.

2:47
I don’t even know what a pullback is anymore. And yeah, in the current market environment, there’s probably some truth to that. We really don’t pull back that much and if we do, it’s like 1 to 2%. I mean, we, this is like one of the longest streaks that we’ve ever been on where there hasn’t been a 5% pullback.

3:02
So I get the point of, you know, we don’t get a lot of pullbacks anymore, but there’s. A very loosey goosey, carefree, the market will always come back. It will always come. Back to the all-time highs, no matter what kind of selling we see.

3:22
And that mentality has continued to get more and more and more aggressive, and that’s dangerous because what you see now is the stock market before we would go through a pullback of a couple of weeks and you would see like a 10% pullback.

3:40
Then eventually we get that V-shaped bounce and we would start moving back up and back up, up, up, and we’d be back at all-time highs. And then it was like the pullbacks were lasting. A week and then all of a sudden the traders would come back into the fold and would buy the market back up and we would go all to the all the way up to the all-time highs again and then you had the Brexit and this is really where it started getting more aggressive in my opinion with the Brexit.

4:08
Everybody knew if the Brexit, you know, became a reality or at least, you know, voted into a future reality, the market was gonna sell off and it did. And it went down hard and fast. I think the market was almost down like 10%, you know, just overnight or somewhere pretty close to that, and.

4:28
People were flipping out. I mean, there, there were halts on the NASDAQ and the S&P and all that in the futures overnight trading. There was sheer panic and then the next, and it, and it held for the entire day and then the next day it kept going down and then by the end of the day, you started seeing a turn in the behavior of the markets and, and that was where the dip buyers came in.

4:47
So this huge, what many people viewed as a cataclysmic event for the stock market. Ended up being a dip buying opportunity 2 L after it happened, so. Uh, after that, the market just went on this massive crusade to new highs, and then fast forward, you get the Trump election.

5:08
So we’ve seen the, the, the last dip, you know, back in June of the previous year or of that, of that year, take about, oh, I don’t know, maybe 3. 3 days to really get it going, but the dip buyers started stepping in around the 2nd day.

5:25
But by the 3rd day it was in full swing. It was by that, by that dip. And then the Trump election has everybody would say Hillary is good if she wins, Trump is bad, and then come election night, Trump starts winning. He starts taking Florida, uh, he starts taking Wisconsin, Pennsylvania, Ohio, and people.

5:48
Start flipping out. You start seeing the futures. They’re selling off hard and fast. But what happens? By the morning time before the market and, and let me remind you, the NASDAQ shut down that night. They had to halt trading in, in the NASDAQ because it was selling off so much.

6:08
By the time the opening bell, the S&P was near break even for the day or well off of the lows. It was heading towards there and then it eventually got there, so. Then with, with the Trump election, you had to buy the dip mentality that literally lasted hours.

6:25
OK, maybe you can say a day, but in reality, it was more like. You know, a handful of hours and before you know it, the market is. It is, is like nothing ever happened. So, and I’m not talking about Trump and Hillary here to get political or anything else.

6:41
I’m just telling you what the rhetoric was, what the markets were looking at the election of Donald Trump being, and it was a very negative view and how it played out was. Ended up being one of the greatest rallies of all time.

6:58
So, but that whole dip buying, you know, by the dip, those guys came in as soon as the, uh, the, the market started selling off essentially within hours, there was a bid at the lows and You couldn’t even get the market open quick enough before the dip buyers were pushing that market back up, so.

7:19
That’s, that’s a little bit of background on the dip bind. It’s getting much more aggressive. It’s a very popular concept in trading today. That is pretty much what everybody’s doing, and, and you’re getting a lot of new traders that are being trained to think that way when it comes to trading, that, that is how you’re actually supposed to profit in the stock market.

7:40
And that’s really not a good idea. I mean, that’s, there’s, there’s a lot more to trading than just buying the dip, even though that’s the most relevant strategy. Of the past, you know, few years. If that’s all they’re learning, they’re doing themselves a grave injustice, so. Now that we know what the what buying the dip is.

8:00
Is it safe as it? Is it a safe strategy to really be employing? So, dip buying or buying the dip is safe as it pertains to the broader market over the last few years, but it’s not necessarily a safe strategy as it pertains to individual stocks. Everybody will tell you when the market dips, buy everything you can, buy your, you know, all the, all the stocks out there, but that doesn’t work with everything.

8:23
Sure, it probably not probably, but it does work with Facebook. It works with Amazon. It’s worked with Google. It’s kind of worked with Apple, um. There’s been a lot of dull moments in Apple too, where it’s kind of traded sideways to lower. It’s been pretty good of late, but you know, just over the last few years, um.

8:40
But there’s a lot of stocks out there that it doesn’t do well with. Yeah. Let’s take CMG, Chipotle, for example. Had you bought the dip on Chipotle, this stock was trading just a few years ago or a couple of years ago at $750 a share. It pulls all the way back to $350.

8:57
At what point do you say, OK, it’s a good point. It’s good to get in on the dip here. It dropped down to $650. Man, this thing’s going right back up to its all-time highs, and I’m going to bank some major coin on it. So you get in at $650 you don’t use a stop loss or anything, and then all of a sudden you’re, you’re holding a stock that is trading at $350 a share from its all-time highs of $750.

9:19
But OK, it’s come back up. It’s at $500 a share. It’s surely it’s going to go back up to, to $750. It’s just taking a lot longer than I expected it to, but then another norovirus. Report up in Virginia and the stock is now trading back in 350s, so.

9:38
Did the dip buying work for Chipotle? I don’t think so. Not at all. That is not a stock that you want to buy the dip on. Let’s take another popular stock, Twitter, TWTR. This stock, when it first came out, it was trading in the 70s and all it’s, all it has done since then is trade down, down, down, down, down.

9:57
If it was at $50 you probably might have thought, hey, I’m gonna buy the dip on this stock, and guess what? It kept on going down. It went down to the 40s. Maybe that was a good time to buy the dip. No, cause it went down into the 30s.

10:14
Well, surely in the 30s. Look, this thing opened up in the 70s. It’s now trading in the 30s. It’s half, it’s, it’s less than half the value of where it opened up at. Now is a good time to buy the dip. Not, not so much because now it’s in the 20s and then it goes down into the teens.

10:36
OK, OK, if you look at the, the, the Twitter stock price as of this podcast, it’s trading around $20 a share. Great. That’s, that’s good. I, there’s, I’m sure there’s some people making some money off of it and everything, but guess what? If you were a habitual dip buyer and all you can do is to buy the dip, that’s how you were trained to play the stock market because that’s the only thing you ever knew, you could have easily seen Twitter as a great buying opportunity at 60, 50, 40, 30, 20, and all the way down into the teens.

10:59
Now, How about Groupon? Well, this stock was trading, you know, when it first started trading in the, in the mid-30s, around $35 a share. You want to know where it’s at today? It’s at $3 and change. This stock has never been a stock worth buying the dip on.

11:17
So, how many people have been burned because they thought that Groupon, this company that a lot of people get a lot of great deals for different services and products and, and everything else, thought that surely the dip buying would work on that. But then you might say, OK, well, you’re just looking at a bunch of social media stocks, we know a lot of those social media companies and Silicon Valley IPOs haven’t always panned out that way except for Facebook.

11:44
Alright, well, let’s take a very. Blue collar kind of company and let’s take Chicago, Chicago Bridge and Iron CBI. Couple years ago, trading at $80. Heck, if I was a crazy, you know, blind dip buyer, I’d be buying CBI at The first pull back to $60.

12:09
I did it, but this, this is a. Stock that has been very popular over the years, but now it drops down to 70. It goes down to 60. Surely $60 a 25% pullback is a worthy debt buying opportunity for this industrial stock.

12:29
Nope, that, that’s not the case. It goes down to $60 then 50. It is currently trading at $18. Now. Is it a good buying opportunity right now? I don’t know. But maybe it goes down to 15 or to below 10, who knows, but the dip buying clearly didn’t work on the individual stocks that I mentioned, and there’s scores of those kinds of stocks out there.

12:53
You take a whole bunch of these retail companies, they are not good dip buying companies, and there’s a plenty of tech companies out there like that too, so. What? Is good for the broader market if you’re buying the S&P 500, the Nasdaq, sometimes the Russell, the Dow.

13:13
Yeah, you’re gonna do OK buying the dip there, OK? But there’s gonna be a time where dip buying on the indices are going to falter just like they did for CMG, Twitter, Groupon, and CBI. Maybe not to the same degree because of course, the examples I gave, those are some pretty significant sell-offs there, but there’s gonna be a time where the market pulls back 10% and you’re gonna say, I’m gonna buy the dip, but guess what, it goes down 20% and then you just lost a whole lot of money, um.

13:42
So The big problem with buying the dip is not knowing when dip buying doesn’t work anymore, because at some point it stops working. Well, how do you know that it doesn’t work? I guess when you lose enough money and you’re tired of losing money because When it’s working, it’s great.

14:00
You, you know, the S&P pulls back to 2200, you buy the dip, it goes up to 2300, pulls back to 2250, you buy the dip, it goes up to 2350, it pulls back to 2300, you buy the dip, it goes up to 2400, and it’s great. All right. But at what point does it, where it’s trading at now at 2,474, if it pulls back to 2400, you buy the dip and it keeps on selling down to 2300, at what point do you say, um, Is this working still?

14:29
I mean, should I be concerned here? And it just keeps on falling and falling and falling. Well, guess what? All those opportunities that you had along the way, those years of buying the dip where you were successful and you made a lot of money. All that profit is gone because one time where the dip buying doesn’t work in the market has a much bigger sell off.

14:51
Wipes out all those profits, so. Did buying. How do you, how, how, how do you know that dip buying doesn’t work anymore? You don’t know that it doesn’t work anymore until it’s too late. The only time that you know that dip buying is not working anymore is when it’s actually not working, and at that point, it’s kind of too late for you, so.

15:14
You can’t By the dip and just blindly expect it to go up every time. But let’s say that you are determined, you’re saying, Ryan, I think you’re full of crap that that buying is here to stay, but I, I guess I can see a little bit of what you’re saying that there is sometimes.

15:36
Going to be situations where the dip buying just doesn’t pan out exactly the way you want. OK, so. What’s the best way to buy that? And I would tell you this, A, don’t buy the dip blindly, OK?

15:52
You stop losses. So let’s get to the first one. Don’t buy the dip blindly. I’ve played the dip plenty of times, but I’m pretty strategic about how I do it. If I see the market dropping a couple 100 points on the Dow or 20 or 30 points on the S&P, the fact that it’s dropping 20 or 30 points is not a reason to buy the dip.

16:14
It isn’t. Just because it’s dropping isn’t reason to blindly go in and say I’m buying the dip, I’m buying the weakness because that’s what everybody else is doing and that’s what I think is supposed to work, because if you do that, that’s how you get burned. Instead, wait for there to be a base, wait for.

16:35
Wait for a pattern to develop that says whether it’s intraday on the 30 minute, 15, or even sometimes on the 5 minute charts or on the daily chart. If you can get it on the daily chart, that’s much better, but there’s been a lot of times where the market, you can see that it’s developing a base on like the 30 minute and even sometimes on the 5 minute chart, like an inverse head and shoulders pattern.

16:55
You can say, all right, I’m gonna buy a little bit of SPY here and I’m going to add to the position as the position. Becomes more profitable or if you’re more aggressive, sometimes I’ve bought UPRO after I start seeing a base form on an intraday chart.

17:12
That’s good, but I don’t go all in. I’m not going, OK, I’ve been 100% cash on this sell-off. You know what? I’m going 100% all in because the market has fallen 20 or 30 points now.

17:33
I’ll, I’ll put 2010, 20% maybe down on a, on a few positions and see if these positions want to increase in value.

17:53
If they don’t and the market continues to sell off, well then I have my stop losses, and that’s the second point. I have the stop losses there to make sure that I don’t get burned, to make sure that the profits that I have made along the way are not all compromised.

18:12
So I, I give up a small amount of profits to see whether or not the dip buying is going to work again, and that’s really the best way to buy the dip.

18:29
You don’t buy it blindly and you make sure to use stocks. So. Just to wrap it up here. Right now with the with the stock market the way it is, the dip buying strategy is working.

18:52
OK, but that doesn’t mean that you do it blindly. You have to be cognizant of the risks that are associated with buying the dip and realize that at some point in the future, the dip buying is not going to work.

19:15
It’s going to burn a lot of traders and you don’t want to be one of them. You don’t want to be the person who blindly buys the dip.

19:37
The market keeps selling off and you’re like, what the heck guys? Why is it not going up? Ramp Capital on Twitter told me that the markets always keep going up and it’s not going up, so what do I do here?

19:53
You don’t want to be like that. You want to always have a risk management strategy in play, and the best way to do that is stop losses.

20:10
That’s the only way you’re going to survive this, guys. You, if you’re going to buy the dip, don’t do it blindly, wait for some intraday chart setups.

20:32
Know that at some point dip buying is not going to work and accept and embrace those stop losses when it doesn’t work to take you out of the trade and to reevaluate the market to see what it’s really wanting to do.

19:15
And you know what? That could be the biggest blessing in disguise is when you get stopped out of a failed dip buying opportunity because if the market’s going to continue selling off, then you’re gonna want to get short on the market.

19:37
You’re not gonna want to be buying the dip. Yeah, sure, maybe at some point you will. I mean, the, the markets for the history throughout the history of the stock market, there’s always been a base at some point.

19:53
You know, even the big sell-off in 2008 resulted in a base in March of 2009, but you don’t want to write it all down. I mean, the sell-offs are just as much of an opportunity to profit from the stock market as the market is rallying.

20:10
And so, when you get the sell-offs, you don’t want to be just blindly buying the dip and giving back all the profits.

20:32
You want to be short in the market. So, know that the buying the dip doesn’t. Always work forever into the future and then at some point you’re gonna have to recognize it’s not working when that happens.

20:51
Don’t continue to buy buy the dip blindly. Use obey your stops.

21:11
Know that these stops are put in for a reason and. And go away with the majority of your profits.

21:31
So that’s gonna be it for today’s podcast. I’m really uh glad we were able to tackle this particular topic. It’s pretty popular and a lot of people have embraced it and I’ve made money off of it too, but you have to realize the risks that are associated with it.

21:51
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22:10
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