Last Updated on September 22, 2022 by Oddmund Groette
The financial market moves in waves — it rises and falls — which is why you hear slogans like “Buy the dip” and “Sell the rip.” Today, we will focus on the “Sell the rip” strategy. What does it mean?
Sell the rip refers to a trading strategy that aims to sell an asset (either closing an open long position or opening a short position) when its price has risen to a level considered overvalued. This investment approach follows the basic principle of “buy low, sell high,” but in this case, the focus is on the selling aspect. The sell the rip strategy is based on the idea that an asset can get overvalued and overpriced, which makes it rip for price correction or even a market crash.
In this post, we take a look at the sell the rip strategy and how to use it to your benefit.
What does it mean to sell the rip?
To sell the rip means to sell an asset — which could mean either closing an open long position or opening a short position — when its price has risen to a level considered overvalued. This investment approach follows the basic principle of “buy low, sell high,” but in this case, the focus is on the selling aspect. The sell the rip strategy is based on the idea that an asset can get overvalued and overpriced, which makes it rip for price correction or even a market crash.
The “Sell the rip” strategy is used by investors and traders who already have an existing long position of an asset and have ridden the bullish sentiment to a level where they feel that the market is overstretched and unreasonably overvalued. When the market is overvalued, the best thing is to sell because a market correction or at least a correction would soon set in.
The strategy can be used for any asset; however, when trying to short-sell a stock, it is better for stocks with weak fundamentals that have been overpriced due to larger market sentiment or overreaction. Investors use the strategy to go short on weak stocks that are unduly overvalued, hoping that the market would eventually correct itself and sell off on those stocks. When the stock eventually falls in price, they can buy them back at lower prices and pocket the difference as their profit. However, note that stock prices theoretically have unlimited upside, so the risk and reward of short-selling should be constantly evaluated — even stocks with weak fundamentals can unexplainably continue rising. Smart traders who use this strategy base their decision on when to sell the rip on careful research and technical analysis.
The sell the rip strategy has been around for a long time, especially among short-term traders, such as scalpers, day traders, and swing traders. For stocks with good fundamentals and huge growth potential, the sell the rip strategy is not a good approach, even for taking profit, as you will likely leave a lot of profit on the table when the stock continues to rise — who says that a stock that has done a 100% profit cannot do a 1000% profit if left to run. Obviously, the sell the rip strategy is not good for long-term investing.
Is sell the rip the same as sell the rally?
Yes, sell the rip is basically the same as sell the rally because both are about taking short-term profits made from a price rally. Technically, though, the “rip” doesn’t just refer to a rally but an overpriced/overvalued market.
Sell the rip strategy is looking to sell into an overbought condition, not just selling on any rally. Selling a lot early would mean leaving money on the table, and for short-sellers, it could even be catastrophic if the price keeps rising to hit their stop losses. The approach is used by short-term traders who want to quickly book profits before a market correction sets in.
Buy the dip sell the rip – mean reversion
Sell the rip is one half of the “Buy the dip, sell the rip” slogan in the crypto market or the “Buy low, sell high” version in the stock market. The strategy works on the principle of mean reversion, which implies that the price oscillates about its mean, such that when the price moves significantly above or below its mean, it becomes overvalued or undervalued.
So, when the price moves significantly above its mean, it is likely overvalued and overpriced and a correction might be about to set in. for short-term traders, that is the time to sell and book profits. For short-sellers, the overvalued condition creates an opportunity to go short and book profits when it falls back to its mean.
The best Sell the rip indicators
The indicators you can use for the sell the rip strategy include oscillators and momentum indicators. Such indicators can show oversold and overbought conditions in the market. You may use them in combination with the moving average indicators, which can show the price mean. Bollinger Bands is unique in that it can show both the mean and the oversold/overbought conditions. Here are the common indicators for trading the buy the dip strategy:
- Relative strength index (RSI): This is a popular momentum oscillator used by many short-term traders. It compares the number of days the price closed bullishly to the days it closed bearishly within a specified period.
- Stochastic: Another popular momentum oscillator used by traders. It measures the current price close to its range over a chosen period.
- Williams R%: Williams %R is a momentum indicator in technical analysis that measures overbought and oversold levels. It is similar to the stochastic oscillator in how it uses price range in its calculation. In fact, it is the inverse of the fast stochastic indicator line.
- Internal bar Strength (IBS): The Internal Bar Strength indicator is an oscillator that measures the position of the current trading session’s close relative to the trading session’s high-low range.
- Bollinger Bands: It has three bands, including a middle band that shows the price’s mean. The upper and lower outer bands can indicate overbought and oversold market conditions respectively.
- Moving average strategies: This continuously measures the average price as new price data come up with every new session.
Sell the rip strategy (backtest)
A sell the rip strategy is coming soon.