Why buying the dip failed

Mar 07, 2022

If nothing else, this current market highlights how important it is to not get caught up in what has worked in the past.  

First, before I get into the nitty-gritty of markets let me be straightforward and let you know I'm offering a huge discount and opportunity for you in the Trading lab this week only. Please don't just jump straight to this opportunity. You should fully read this email, understand why just buying the dip is not a proper strategy and why learning how market regimes work could change the game for you.  

Understanding market regimes is what most struggling traders lack. But what is a market regime?

A market regime describes the different market conditions, bullish, bearish, or neutral direction and high or low volatility.

A way to think about it is like the seasons, Winter, Spring, Fall, Summer. Each season has unique characteristics that dominate such as cold, mild, warm, or hot temperatures. Long sunny days, short sunny days. 

If you know the season you are in, you can plan your day around it, what you wear and what activities you might do during those seasons. 

Similarly, market regimes have characteristics that are unique. 

Bull Volatile - major market tops, high % change days skewing upward accounts for 14% of trading days on $SPX since 1951
Bull Quiet - low volatility price rises, dips that are bought succeed, accounts for 34% of trading days on $SPX since 1951
Neutral - mean reversion market, two-way trading, accounts for 37% of trading days on $SPX since 1951
Bear Quiet - account for 13% of trading days since 1951 on $SPX, slow painful bleed lower
Bear Volatile - capitulate bottoms, major market bottoms, led by the news, high volatility, emergency rate cuts, circuit breakers, Fed intervention, account for less than 1% of all trading days since 1951 on $SPX

You can see that Neutral, Bull Quiet, and Bull Volatile market regimes accounted for a good amount of time the past few years because dips were bought and that strategy succeeded. 

When that stops performing, you can bet we are in a new market regime, Bear Quiet and (micro) Bear Volatile. 

Most traders suffer from recency bias. What worked most recently should keep working. But if you notice how long each regime lasts, you can anticipate which market regimes will be dominating soon enough. Improving your edge. 

The bulls want an obvious and quick return to the bull trend (accounting for nearly 85% of trading days historically).

The bears want this market to keep selling off, what's been working should keep working aka recency bias (accounting for 15% of trading days historically).

The Trading lab is always in tune with the current market regime. 

 Since the March 2020 CoVid bottom to December 2021, buying weakness in the NASDAQ ($NQ, $NDX, $QQQ) and holding for longer periods, has been the best game in town. Which has been covered thoroughly and executed in the Trading Lab. 

During that period there were times to exit, take profits, reset, and start buying weakness again. In the Trading Lab, we call these types of trades "campaigns".  

Back in 2020, members of the Trading Lab got to ride along with this MASSIVE trade, adding to their position 14 times then being alerted one day before the major selloff in September 2020

The key here is having a system to use in all the different market regimes Or to only trade in a certain market regime and focus on finding assets within those regimes. We teach this thoroughly in the Trading lab.  

As nearly 85% of all trading is in Neutral, Bull Quiet, and Bull Volatile market regimes, I focus on those regimes and I don't worry much about the bearish regimes. 

Side Note: for bearish regimes, my strategy involves day trading long/short Futures and Options. Both strategy courses are included with The Lab.

The life cycle of going from a neutral market regime, to bull quiet, to bull volatile lends itself perfectly to a trending/momentum strategy. Which I built-in 2016. Taking small entry positions early on, then adding to it until ultimately reaching conditions for major market tops and exiting at ideal strategic locations, usually holding on to positions much MUCH longer than most traders. 

The goal of the system was to catch long-term trends entering with low risk and building up to very large positions and having defined rules to add as well as when to sell.  

 Selling too early had always plagued my swing trading and I wanted to identify a system to keep me in as long as it was safe, ie, no risk of a margin call or getting trolled out of a position by "duh algos".  

 This is also the same system I use in Crypto, in fact in 2017 I took $1592 to over $3 million dollars with this very same strategy, but that's another story.  


CNBC, FinTwit, every YouTube/Instagram trader, or every trading book in history, glamorizes the courage and conviction to deploy ALL of your capital at the absolute bottom tick (or top tick if shorting).  

I've manually backtested 150 years of data and have yet to find a high probability of the account surviving the volatility from buying major bottoms in size.  

But here's the thing, what is trying to be accomplished is entering into a long-term trend early, and holding for as much profit as possible.  

That's what a momentum strategy is.  

The earlier you enter into a trade, the higher the risk, but the higher the reward...and glory!  

If you are interested in understanding how to create these systems or even just use one of my proven systems then you probably should be a part of the Trading Lab


Possible Explanations of Momentum There are several possible explanations for momentum. One is that momentum’s higher returns are compensation for some unique risk associated with investments that have recently outperformed. Yet, no such risk factor has been convincingly identified. If it is not compensation for risk, the existence of momentum seems to challenge the efficient market hypothesis that past price behavior provides no information about future behavior. In other words, momentum is associated with some inefficiency in markets, perhaps due to investor behavior. Several possible behavioral explanations have been put forth.  

First, investors may be slow to react to new information. The efficient market theory assumes that once new information is released, it is instantly available to all investors and that prices immediately adjust to reflect the news. In practice, however, different investors (for example, a trader versus a casual investor) receive news from different sources and react to the news over different time horizons and in different ways. Also, anchoring and adjustment is a behavioral phenomenon in which individuals update their views only partially when faced with new information, slowly accepting its full impact. There is ample evidence supporting slow-reaction-to-information theories, ranging from market response to earnings and dividend announcements to analysts’ reluctance to update their forecasts.  

Second, investors (as human beings) are prone to what behavioral economists and experimental psychologists call the disposition effect. Investors tend to sell winning investments prematurely to lock in gains and hold on to losing investments too long in the hope of breaking even. The disposition effect creates an artificial headwind: when good news is announced, the price of an asset does not immediately rise to its value because of premature selling. Similarly, when bad news is announced, the price falls less because investors are reluctant to sell.  

Third, investors are susceptible to the bandwagon effect (also called over-reaction). Short-term traders may use recent performance as a signal to buy or sell. Longer-term investors look to recent performance to confirm their convictions. The interaction between these investors can create price run-ups or -downs that can persist for many months until an eventual correction. Notable extreme examples include the technology bubble of the late 1990s and the energy rally of 2007-2008.  

There continues to be a lively debate about the root causes of momentum. (A similar debate is ongoing for value investing as well). What is clear is that the overwhelming evidence from a range of markets, asset classes, and time periods supports the argument that momentum is neither a random occurrence nor an effect that disappears once the impact of transaction costs is incorporated.


In essence, waiting for the trend to develop further you have less risk and more assurances that a longer-term trend is in place, that most market participants expect to end sooner.  

This is THE EDGE to exploit in momentum systems.  

Why am I bringing this up now?  

This past week in the Trading Lab, we got long the S&P 500 via $SPY calls at what appears to be the beginning of a long campaign.

If this campaign plays out as per the system model, this is the beginning of a potential 6-month uptrend.  

Trading Lab Members will have access to this campaign, as it plays out, being notified in real-time as we continue to add to this trade.   

As a Trading Lab member, you receive...  

Daily Livestream - Day trade right alongside me, see what I'm looking at in the markets, work alongside a team of fellow traders.  

Daily Morning Brief - each morning I cover what key levels I'm watching, what markets I'm watching that day, and potential trade ideas.  

Monthly Macro Trade Strategy - Our long term Global Macro focused ETF end of Month strategy  

Swing Trade Alerts - Real-time trade alerts for Options, Futures, Forex, Crypto   

Prop Swing Alerts - Designed specifically for Prop Traders who are doing tryouts or managing a live prop account. These are end-of-the-day, swing trades in FX, Commodities, Equities, Metals, Energy, and Interest Rates markets. 

     $200 off The Trading Lab is only $97 for your first month!

Stay connected with news and updates!

Join our mailing list to receive the latest news and updates from our team.
Don't worry, your information will not be shared.

We hate SPAM. We will never sell your information, for any reason.