Tips To Navigate A Bear Market: How To Make The Most of a Downward Trend
A bearish market is no walk in the park. Traders need to be dodge several landmines to make sure they (and their pockets) come out of it unscathed. We present you with 6 tips that will help you weather the storm and ensure your profits do not suffer excessively when there is such a trend.
*Sage FX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
- What is a bear market?
- What are the technical strategies you can employ?
- What are the personal attitudes that will help you protect your profits?
It is easy to prove yourself as a sterling trader when the markets are booming with stocks and currencies rising within the charts.
Trading through a bearish market, however, is the ultimate Mount Everest for any reputable trader. A bearish market is when there is a 20% decline from recent highs across all markets in the prices of assets. For traders, a bearish market is no walk in the park and traders need to dodge several landmines to make sure they (and their pockets) come out of it unscathed.
Here we present you with 6 tips to make sure that a downward trend in the markets becomes bearable. These tips will help protect your profits and help your funds not suffer excessively in such a trend.
#1: Research Excellent Stocks You Could Invest In
As all traders know, a downward trend presents a good opportunity to invest. The buying price will be low with the opportunity to yield higher dividends during a bullish market. Traders must research stocks that have consistently good profits and a generally positive forecast. Why? They are sure to go back up again when the market returns to a more stable condition.
#2: Go Short On Bad Stocks
This is the flip side to the previous strategy. When a stock is already bad prior to a bearish market, the likelihood is that it will continue its downward descent. Shorting the stock when the stock continues falling can be beneficial. However, bear in mind that it can be risky shorting a bad stock. You might experience unlimited losses if the stock unpredictably goes up.
#3: Use Margin
Using a margin can be a powerful tool for any trader. Margin is when a broker lends funds to traders to help them buy securities. A strategy traders can employ to combat a bearish trend can be to buy dividend-paying stocks after they have corrected using a margin. Keep in mind that margin does add an element of risk to the situation giving it is borrowed money at the end of the day. Traders also need to make sure that they do not use margin before the stock has corrected or has fallen. If you buy stock using margin when the stock is falling, it can be quite damaging.
A strong basis for any good business: diversifying your portfolio. Putting your eggs in one basket might be fatal if the economy comes crashing down in the particular sector of the economy you are investing in. Investing in a variety of stocks that are in different industries might be your solution to weathering the bearish market storm. When the economy is booming, luxury items such as automotive industry, innovative technology and entertainment are bound to do well. A case-by-case analysis needs to be taken for every bearish market. For example, in 2020 during the COVID-19 pandemic, most stocks were not performing well.
However, people were staying at home more, making use of streaming services. This caused the value of entertainment stocks such as Netflix to skyrocket, leaving investors very happy with their profits. A safe approach is to invest a little in the different industries, making sure that regardless of where the economy hits you will have something to fall back on.
#5: Do Not Overspend
Another crucial rule that will help you navigate your finances, both when trading on the markets and in your personal financial management. Investors should never use funds that were budgeted for everyday expenses such as groceries or paying bills and invest them in stocks. Generally speaking, investors should not invest in equities unless they have an investment horizon of at least 5 years.
An investment horizon is the length of time that an investor expects to hold an asset. A bearish market is not impossible to overcome however it can wreak havoc on your finances if the money invested is needed straight away. Time needs to be on your side and you need to be in a strong enough position to wait for your money to reap the rewards from the market. This leads us to the next point.
#6: Be Patient and Keep Calm
This applies to most trading strategies but it’s always good to keep it in mind. Especially when the markets are turning downward, it is easy for fears to grip you, influencing your trading decisions negatively. Stay objective regardless of the market’s activity. Remember that it is normal to have such trends for some time and that what comes down will go up. If you want to learn more on how to keep a sharp mind when trading then head over to The Mental Condition & Forex Trading: A Dynamic Duo.