Insight 4: Trading the Dip by Vespasian

Updated: May 13

There was some interesting discussion this morning on the Football Index Twitter timeline along the lines of benchmarking a player’s previous price to their expected future price. Not necessarily ‘sides’ of an argument, as both of the following thought processes are correct and not in direct disagreement of each other, but here is the summary of the point:


a) Player X looks good value. Pre dip was £x.xx now only £x.xx

b) Player being below previous peak is not a reason to buy


The response from trader (b) is valid but reading between the lines there are a number of caveats. Of course, if a player hits a hattrick and has a 20p match day spike off the back of it then it’s not a good reason to buy a month later after a 15p dip, simply because the player hit that peak price before. The rise can be attributed to match day flippers and In-Play Dividends (IPDs) hunters and expecting the player to hit that peak again would be gambling that they can reach that performance again.


However, if a dip can be attributed to simply not playing games i.e. through injury, suspension, summer or extreme circumstance such as Covid, then it is reasonable to assume a rise to their previous price once football returns. Similarly, an MB hitter or particular transfer target may peak in Dec/Jan then dip through Feb-May could be logically expected to rise again during the next media promotion/transfer window.


Westy wrote a poignant article recently about buying the dip- see Foresight 3. In line with the above market discussion on twitter and in follow up to Westy’s article, here is a little note on trading the dip.


Trading the Dip


Primarily, not solely as I have a mixed strategic approach, I am a short-term trader. Short termism can take many forms in the world of Football Index:


  • Match day flips – buying a player on form or with a particularly appealing fixture. Buy in the lead up to the match and sell before kick-off

  • In-game flips – fastest finger first buying a goal scorer or someone posting a good early PB score

  • Fixture trading – research teams with appealing or volume of fixtures in a period and either buy in advance and sell to the IPD hunters, or play for the IPDs yourself

  • Transfer rumors – buy the rumor sell the fact

  • Team sheet news – maybe a youth is finally given a chance, or a cheap striker gets the go ahead

  • Injury trading – two sides to this coin, buy an injured player once their price drops, or buy one of their teammates who benefits from a space opening up on the team sheet

  • Set piece taker changes – find a new set piece taker and watch as the market builds this increase to PB into the price

And many more…


Why trade like this when many of those circumstances above would only lead to a 5-20% change in price whereas holding those players you will see market growth beat that %?


In my mind it’s because they are easy to spot and easy to time. Making 10% may not sound groundbreaking, but if you can do that daily/weekly or even monthly it’s going to add up to a very nice annual return. You won’t get the glamorous screenshot as you would after 3 years one of your players has risen from 50p to £2, but you can potentially make a lot more money.

Caution!


Some warnings before making it sound too easy or as if I’m pushing this as a strategy for everyone;


  • It takes time, research, effort

  • You need to trade more which means being available to trade and keeping an eye on prices in order to do so

  • Skill, experience and acceptance – you won’t get 100% hit rate – it’s far easier to diversify and leave a port alone and let market growth carry even your worst picks to profit

  • Be ruthless – if you make a bad choice don’t let that trade tie up your capital and don’t let it continue to erode the money made on good choices. If the player is a good buy, wait or top up, but being reluctant to instant sell (IS) simply not to lose money on a trade kills short term strategy

  • Bigger budget – makes it harder to have all your capital working for you. You need to stay liquid and not buy too many shares in players (kills the margin and hard to exit) and you don’t want too many players either (as mentioned above you need time and effort to monitor news and price changes).


With all that in mind, the key and essential to me (as per recent poll debate ‘fun vs profit’) is to enjoy trading. It’s become a hobby for me, I truly enjoy trading in and out of players and accept the odd loss. It’s been a very profitable strategy for me, which I suspect contributes and feeds the fun too!


An example:


I will now show an example of buying a dip and the thought process before and during the trade. I’ve scrubbed the player name of trade out – it’s not important as this applies to thousands of players on the index at the moment. For those who are bothered, it’ll be obvious and easy to work out anyway!


Here is a typical graph of the last 3 months. Focusing on mid Feb to current as this is when Covid started getting serious and many traders reduced their risk in FI.

For this player, their Feb resting price is between £1.10 and £1.21. During ‘the dip’ the player has sat between £0.96 and £1.06. First thoughts are there is a good 10-20% rise in the tank for simply returning to football.

We can look a little further back and see far higher peaks. This is where trader b's (from the intro to this article) point is important. That peak on this player can be slightly dismissed as it coincided with good PB and goals.

On this player, I was a little late to the party but I essentially still got on at a price that I believe offers a 10% rise to an expected minimal post dip price of £1.20.

Average price £1.08, originally bought 300 @ £1.09. Then bought another 300 as he dropped to £1.08.

You’ll note there is also some sales shown. When I bought the player, I had an exit price in mind of £1.20. I listed 100 shares when he reached £1.20 and they sold at £1.19… happy with that.

I’ll now illustrate another thought process I have concerning ‘easy money’.

I think of the green section £1.05 -> £1.20 as ‘easy money’ because for it to happen, I simply have to wait for football to return and this is his him going back to his pre-dip price. I like to trade the easy money as it tends to be quick. The first 10% rise on a player tends to be the steepest curve and, in my opinion, the lowest risk.


However, I’ve held 500 at £1.20 because I’m now attracted (the gamblers greed) to slightly harder money. In this case, the player is £1.19 and still a few weeks away from football resuming. He plays in the league most likely to have match days before all others. Therefore, I’m applying a base price markup based on the fact there is much less competition. His first fixture back is, on paper, favorable – he has history of IPD and PB so I believe £1.30 fits my risk appetite.


The other values there are included because they are realistic. I want to illustrate that being short term doesn’t have to be about buying at absolute bottom or selling at absolute peak. Maybe I am alone in this, but I don’t actively try to sell at peak; that’s difficult and why would I chase the ‘difficult money’ on a player where I’ve just taken the ‘easy money’?


£1.40 is very realistic if this player continues the form he was on and posts a good PB score or gets a goal/assist. £2+ is a realistic long-term price based on growth, a dividend increase or international call up which could all happen in the next 12-24 months for this player. I’ll be very happy to exit at £1.30-1.40 and it won’t bother me at all if a month later he wins PB and is £1.80.


For the first 100 shares, I’ve already made nearly 10% in 2 weeks. If I can make 20% on the remaining 500 shares in a month, it will have been a fun and profitable trade (with annual return equivalent well over 100%) and … it’s EASY!

A reminder that we want this website to be very inclusive and hopefully, over time, become a useful guide to new and seasoned traders alike. If anyone has an insight, hindsight or foresight to share, please contact us.


Have fun, stay safe – comments appreciated.