Buy The Dip

Financial markets tend to fluctuate, with asset prices increasing based on several factors. One of the strategies that has become popular among investors is BTFD (Buy The Dip). This article seeks to define this term simply, describe how it works and the risks involved, and give examples from real life to enable beginners to understand and consider this strategy. 

What is BTFD (Buy The Dip)? 

BTFD stands for “Buy The F*ing Dip,” an informal expression adopted in trading and investment communities. It is defined as buying an asset when its price is temporarily falling, with the hope that the dip is a fleeting phenomenon and that the price will recover in the future. 

The fundamental concept rests on “buy low, sell high.” The investors seek to take advantage of short-term corrections in the market, with the expectation that dips are opportunities to buy undervalued assets at bargain prices 

Understanding BTFD (Buy The Dip) 

BTFD rests on a few concepts: 

• Market Cycles: Financial markets always experience periods of fluctuation. Dips are regarded as temporary dips in a broadly rising market. 

• Mean Reversion: This concept asserts that asset prices tend to revert to their mean over time. Thus, a dip is considered short-term before prices revert to their normal levels. 

• Long-Term Growth: Most people think that assets with solid fundamentals will bounce back from temporary dips and keep growing in the long run. 

How Does It Work? 

1. Spotting a Dip: Recognise when the price of an asset has dropped because of market fluctuations or shifts in investor mood.
2. Evaluating the Asset: Determine whether the asset’s underlying value is still robust even after the price decline.
3. Determining When to Purchase: Use aids such as charts and indicators to identify the ideal moment to purchase.
4. Awaiting a Comeback: Following the purchase, hold onto the asset in anticipation of its price appreciating once again.

For instance, in a market-wide sell-off triggered by short-term economic news, quality companies’ stocks may witness a price decline. A BTFD investor would view this as an opportunity to purchase these stocks at a reduced price. 

Risk Management in BTFD Strategy 

While purchasing the dip could be lucrative, care must be taken to manage the risks incurred. 

Key Risks: 

1. Falling Knife Situation: This is where you buy when the price is falling, but the price just keeps on falling.
2. Misestimating the Dip: Not every dip is temporary; some are harbingers of doom for the underlying asset or market.
3. Timing Issues: It’s tough to guess the exact bottom of a price decline.

How to Minimise Risks 

• Set Clear Buy and Sell Points: Decide in advance the prices at which you’ll buy and sell to avoid making decisions based on emotions. 

• Use Stop-Loss Orders: These are automatic sell orders that trigger if the asset’s price falls to a certain level, helping to limit potential losses. 

• Diversify Your Portfolio: Spread your investments across different assets to reduce the impact if one doesn’t perform well. 

• Invest Wisely: Invest only a fraction of your investment capital in purchasing dips so that you won’t expose yourself to too much risk. 

• Stay Updated: Monitor market conditions and your assets’ performance regularly to ensure they meet your investment objectives. 

Trading Strategies & Execution for BTFD 

A successful application of the BTFD strategy incorporates technical and fundamental analysis. 

Technical Analysis: 

• Moving Averages: Monitor the asset’s average price over a particular duration to follow trends. 

• Support and Resistance Levels: Identify price levels where an asset will reverse its decline (support) or upward movement (resistance). 

• Relative Strength Index (RSI): An indicator used to calculate the velocity and degree of price change to gauge if an asset is overbought or oversold. 

Fundamental Analysis 

• Financial Well-being of the Company: Look at the figures like revenue, profits, and debt to know how stable the company is. 

• Economic Conditions: Consider broader economic information that can affect the performance of the asset. 

Tips for Execution 

1. Have a Watchlist: Follow stocks with sound fundamentals that interest you.
2. Keep Savings for Buying the Dips: Allocate money for purchasing on declines.
3. Don’t Take Too Much Borrowing: Invest only as much money as you can afford to borrow without debt.
4. Remain Patient: Be aware that it may take months for the asset’s price to bounce back after a decline.

For example, during the COVID-19 pandemic in 2020, leading indices such as the S&P 500 had steep declines but bounced back strongly within a few months. Investors who purchased during these drops had huge profits as markets rallied. 

Case Studies & Historical Examples of BTFD 

Case Study 1: S&P 500 Rebound After COVID-19 

The S&P 500 index declined by more than 30% in March 2020 due to fears of the pandemic. However, individuals who bought during this drop profited, as the index recovered by almost 70% by December 2020. 

Case Study 2: OCBC Bank in Singapore 

Historically, OCBC Bank’s share price has been resilient after it dropped due to factors outside of the company’s control, such as economic slowdowns. Investors who purchased shares during these dips frequently enjoyed higher purchase prices than traditional investment strategies. 

Such examples illustrate how buying the dip in a disciplined manner can yield enormous profits. 

Frequently Asked Questions