What Does Buy The Dip Sell The Rip Mean?

Even if you’re a newbie investor, you’ve likely heard the terms “buy the dip” and “sell the rip.” Warren Buffett even has a famous adage, “be greedy when others are fearful (buy the dip), and be fearful when others are greedy (sell the rip).

We’ll break down what exactly these two commonly used terms mean, and whether they’re good strategies to apply. 

What Does Buy The Dip Mean?

When an investor says they are “buying the dip,” it means they’re buying a stock or index after its value has fallen, or dipped.

As share prices dip, some investors view it as an opportunity to pick up shares at a discounted price and, in turn, enhance their future gains when (but, really if) the stock’s price rebounds to its previous high — and beyond. 

People generally buy the dip as a reaction to short-term price movements. Therefore, buying the dip is not a recommended strategy for long-term investing.  

It differs from the buy the fear philosophy of long-term investing guru, Warren Buffett, who prefers to buy when there is a major sell-off, not just a blip on the screen lower.

What Does Buy The Dip Sell The Rip Mean? So, “buy the dip, sell the rip” is a phrase investors use to express buying as many shares as possible when the market dips and selling fast when the market is hot.

Is Buying The Dip A Good Idea? 

There are a number of factors that influence whether buying the dip is a good idea. Like any investment strategy, buying the dip has its unique set of pros and cons.

The pros of buying the dip include:

• You can lock in a lower average cost for your shares.
• Buying the dip is comforting because you have the satisfaction of knowing you didn’t buy the stocks “at the top” or “on the rip.”
• A high potential for profitability once the stock price rises.

The cons of buying the dip include:

• You miss out on dividend payments that could be re-invested at lower levels.
• Very hard to predict in advance — especially the dip’s magnitude.
• There’s no guarantee the stock’s price will recover if the underlying business is damaged.
• You may miss out on further gains if the price doesn’t drop as expected.

Is Buy The Dip Sell The Rip A Good Idea?

With the pros and cons in mind, there are specific types of traders who should buy the dip.

Prime candidates are investors who are:

Risk Tolerant

As you can tell by now, trying to make meaningful profits over a short period of time in the market comes with its fair share of risks. The best candidates for this strategy are investors who aren’t afraid to lose a few bucks on their hunt for treasure. 

Skilled in Technical Analysis

The process of analyzing stock chart trends to determine where a stock’s value is headed is known as technical analysis. Swing traders use indicators such as support and resistance in order to craft a theoretical range where the company’s price should oscillate between. 

Candidates who are best-suited to buy the dip have a deep understanding of technical analysis and can use it to make fast-paced market decisions.

Don’t Care About Income from Investing

Since buying the dip is such a fast-paced process, investors who use the strategy rarely hold a stock long enough to collect dividends. This strategy simply doesn’t fit the bill for long-term investors who depend on their investments for income.

In a nutshell, buying the dip is a strategy that relies on being able to predict future price movement. If you can perfectly time the market and buy shares at a low price right before they increase in value, you can earn a pretty penny. But, timing the market is no easy feat, and investors are just as likely to buy shares that keep falling rather than ones experiencing a mere price dip.

If you’re a seasoned, confident investor, buying the dip may be worth your efforts. But for more investors, a simple, longer-term strategy is likely to be a more wise investing choice.

 What Time Do Stocks Usually Dip?

Stocks are known to dip around 11 a.m. ET due to market makers balancing options positions and during the 3rd week of the month due to monthly options expiration.

In fact, many professional day traders stop trading between 11 a.m and 2 p.m ET. because that’s when volatility and volume usually start to taper off.

Buy The Dip Sell The Rip Trading Strategies

Does the dip’s size matter?

Unless you have specifically laid out ahead of time the price drop that would make you buy more shares, it’s hard to define a “dip size” that can be applied universally. 

Typically, the bigger the dip is, the more investors stand to gain — as long as the stock price bounces back to its previous high. But, once a stock experiences a shift in its underlying fundamentals, it might never return to its previous levels.

How do I buy the dip?

The practice of buying the dip involves holding a portion of cash or lower-risk liquid assets out of the market and waiting for market prices — stock, bonds, index funds, and even cryptocurrency values —to drop. 

When the prices fall, take all or some of the cash you’ve been holding and buy more of the stock. This strategy lowers your overall average cost and can enhance your returns as long as you hold the asset long enough, and its value increases over time.

How do I know when to buy the dip?

Predicting when to perfectly buy the dip is extremely difficult. There are some momentum indicators that can help you gauge the strength of price movements in both directions. Long-term trends can also be helpful. 

Is there a way to manage the risks of buying the dip?

If you decide that buying the dip may be an effective strategy for you, here are a few essential things we recommend doing:

• Placing a limit on how much you decide to keep out of the market. This should be a rather small percentage. For example, say you have $100,000 to invest. You should keep a modest amount uninvested, say between $10,000 to $20,000.
• Understanding the possible consequences of uninvested money, which include missing out on tax breaks and qualified dividends.
• Understanding this investment strategy is unorthodox as far as generating reliable after-tax returns. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.