You might have heard the saying “buy the dip sell the rip” often in investor calls or from market analysts. While “buy the dip” may seem simple enough, what does “sell any rips” mean? We prepared a complete explanation of the phrase for you below.
What Is a Rip in Investing?
A rip refers to the presumed peak of a market cycle. It is considered the best time to sell a stock (or other financial assets).
Both markets and individual stock prices move in cyclical patterns. They do not move in linear upward or downward trends.
Traders looking to benefit from this nature of the stock market use many ways to identify the best times to buy and sell. The intent of this strategy is to buy when the cycle is at its downward trend and sell when it is at its peak.
What Is a Dip in Investing?
Dips are presumed low points in a market or stock cycle (which we discussed above).
They are considered the best time to buy a share because it is selling at a (comparatively) discounted price.
There are many ways to determine rips and dips, depending on the market pattern that a trader is following (there are many kinds of patterns, which we will discuss later).
For example, one simple way to identify lows is to mark a certain percentage (such as 10% or 15%) drop over a recent peak in the stock’s price.
Whenever the share touches or falls below this percentage, a trader following this strategy should buy it.
Another popular method, Fibonacci retracement, uses 23.6%, 38.2%, and 61.8% as key markers for both highs and lows.
There can also be other types of strategies, but the idea is always the same. Mark a point that is the presumed nadir of a cycle, and buy the stock at that point.
What Does Sell Any Rips Mean?
Selling rips refers to selling stocks at the highest point of their cycle.
A rip is presumed to be the maximum price that a particular asset will reach during its sequence, and afterward, it should fall back down.
Hence it makes sense for the investor to sell their holdings at this point.
However, one key criticism of this strategy is that past performance does not always indicate what will happen to the stock in the future.
So, selling on such crests does not guarantee future gains. It is merely a strategy and should be used judiciously while taking other factors into consideration.
What Does Buy the Dip Sell the Rip Mean?
Buy the dip, sell the rip is an investment strategy that attempts to take advantage of cyclicity in stock markets to maximize profit from trading a security or other financial asset.
There are two parts to this saying:
“Buy the dip,” which refers to purchasing a stock at its lower price in the sequence, and “sell the rip,” which means selling the security at the highest value in the cycle and locking in profits.
Two key challenges of using this strategy include identifying a cycle and using yardsticks to establish these rips and dips.
Related: Is It Time To Start Buying The Dip In Stocks?
Identifying a Cycle
Markets and stocks move in cycles, and this was first established by Charles Dow (founder of the Dow Jones Index) over a century ago.
Market makers use patterns, technical analysis, and other strategies to identify these sequences of movements, with the intent to make a profit from the process.
Here are a few examples of types of market cycles:
- Business cycles
- Four-phase
- Sector rotation
- Calendar
- Wave-based
- Presidential
Cycles can be long (such as business or economic cycles, which could last for decades) or they can be short-term price movements that have only lasted a week.
Each may have a different frequency, regularity, or magnitude of crests and troughs. This is why identifying and profiting from them is more of an art than a hard science.
Identifying Rips and Dips
There is no standard mechanism to identify rips and dips in a cycle.
In fact, some have likened these cycles to a barometer of the collective pessimism and optimism of the trading community.
Hence, there are many yardsticks that one might consider useful to judging this “mood of the market.” Some of them could be:
- Economic measures
- Sentiment analysis
- Demand for bonds over stocks
- Option trends
- Stock Price and momentum indicators
- Volatility measures
- Level of margin debt
- Technical indicators
Investors use these metrics to identify how the market is “feeling” and whether a rip or a dip is due.
What Is a Face Ripper in stocks?
A face ripper is slang for a huge market rally, which could end in a big rip, indicating a time to sell off.
One key indicator of such a rally is a huge, sudden, positive movement in most stocks across the board.
Note that such face ripper rallies usually happen when the market is bearish or has seen a major sell-off recently.
This is because it is easier to rise by a huge percentage after big market dips rather than in an already growing market.
What Is a Bear Market?
A bear market is a prolonged period of a sharp decline in stock prices across the board. Usually, a drop of 20% or more in stocks from a recent market high indicates a bear market.
Bear markets are also characterized by negative investor sentiments and pessimism among most traders.
Usually, a bear market sees a key market index (such as the S&P 500) drop by a big margin, thus showing that stocks across segments are declining.
But sometimes, it could also be a sustained drop in a particular stock or industry, especially if it lasts longer than two months and drops more than 20%.
Most investors view bear markets as a precursor to an economic downturn or recession. Hence they are often feared and seen negatively.
Bear markets are often contrasted with bull markets, which we discuss next.
What Is a Bull Market?
A bull market is a period of rising stock prices and a growing financial market.
Even though it is most often associated with stocks, the term can apply equally to any financial asset, such as options, commodities, real estate, etc.
In direct comparison to a bear market, bull markets may see a growth of 20% or more over a recent dip.
A bull market rally could be across the board (as reflected in a key market index) or for a particular market segment.
It usually lasts for several months or even years on end.
Final Thoughts
“Sell any rips” is one half of a cyclical trading strategy that tries to use regular ups and downs in stock prices to maximize profits.
While the strategy itself looks simple, identifying a cycle and its highs and lows requires lots of analysis and research.
Investors may use technical analysis, movement charts, sentiment analysis, and other ways to determine the opportune time to buy and sell a share or other financial asset.
Like all trading strategies, this one should also be followed judiciously.
Just because a certain trend has been observed in the past does not mean that the cycle will repeat itself in the same way next time.
You might also like:
Tags:
