A bearish market is the kind of trend that most traders and investors dread. Stock prices are falling resulting to fear and panic. However, a bearish market is not as bad as it really is. In fact it is a great time to buy stocks. Experienced traders and investors make a lot money from a bearish market. A bearish market is a little complicated and a lot riskier to trade than a bullish one. Stock prices are more prone to go down. Investors on the other hand look at it as a golden opportunity to purchase stocks because the prices are less and knowing that the market will regain bullish momentum anyway sooner or later.
Trading and investing in a bearish market requires a different approach than a bullish one. Here are some tips on how to successfully trade and invest in a bearish market. Read on and avoid committing the most common mistakes average traders and investors make.
1.) Control your emotions. If greed is your greatest obstacle in a bullish market, panic and fear are for a bearish one. Panic could lead you to make unfounded decisions while fear keeps you from taking a supposedly great opportunity. One of the most common mistakes that people make is to follow price action during a bear market. Take note that the time a price of a stock rise on a bear market is relatively short thus if you see something that rise, there is a good chance that you’re already too late. Do not let your emotions decide for you. Instead of panicking, stay calm and find confirmations about the downtrend. Is it a correction? Are there catalysts that will push the market back up? Are there good fundamentals on a particular stock? Facts and figures can make you decide correctly and control your emotions.
2.) Buy on breakouts, sell quickly. Breakouts are very common in a bearish market as corrections are in a bullish one. The very good thing about a breakout is that once it has started, most traders will flock to it and it is a matter of who came in first or who bought the lowest possible price. Don’t stick too much on a particular stock because it will go back down in an instant. A gain of at least 3% is already good enough. However, if you’re confident about a particular stock be it because of its fundamentals or technicals, you can go higher. Some smart traders could earn as much as 10% on breakouts. Breakouts are more ideal for traders than investors because they are short term uptrend spikes. Investors might stay away from breakouts and rather wait for the price to get lower.
3.) Tighten cut loss. Cutting your losses is a very important strategy in the stock market. Because of the unpredictability of the market, you can never be certain of your decisions despite of technicals and fundamentals. You might have seen several stocks going for a nosedive despite of very positive news. Cutting your losses can prevent you from losing much of your money and keep you from relying on false hopes. In regular market, you can set a cut loss of 8% of your equity at most but in a bearing market, tighten it a little bit by setting it to 4% at most. Take note that no matter how good the technicals and fundamentals are, everything boils down to price action and market sentiment. You can never beat the market thus all you have to do is cut your losses quick.
4.) Don’t buy on hype. Have you ever heard brokers and firms say that a certain stock will go up? Be very careful because these brokers are hyping up several stocks in order for such to gain market sentiment. In most cases, these brokers or big players chose such stocks and wanted other traders and investors to get in in order to push the stock up. Once it reaches a certain point, these people sell the stock down and those that entered late end up losing. Remember that breakouts don’t last long thus the earlier you get in and earlier you get out, the better your chances. In this case, nobody has the better position than the brokers because they initiated the push and let the smaller market players push it up with the belief that such stock has gained momentum.
5.) Do research. Everything boils down to facts, facts, and facts. Frequently visit your stock market’s site and find as many data as possible. Study and analyze the general trend of the market and see to it if there are any existing catalyst that might push it up or at least push some stocks up. Among the things that you should look for are financial statements, dividend reports, diversification plans, and the overall status of the economy reflected in GNP. GDP, and inflation rates. Trading and investing are relatively simple but isn’t easy. If you want significant gains and succeed, you should do your part. Enrich your knowledge and update yourself too often. You’ll take gambling away from the stock market if you do so.
6.) Are you a trader or an investor? It is very important to identify yourself because traders and investors have different strategies when it comes to a bearish market. Traders face way higher risks and are a lot more active in trading while investors could stay on the sidelines and wait for the perfect opportunity to come in. If you’re a trader, always identify your cut loss limit and always update yourself with fundamentals and technicals. A bearish market is very promising and rewarding for traders as long as it is done right. If you’re an investor on the other hand, it might as well be wise if you stay on the sidelines for a bit and wait when the market resumes an uptrend. Avoid the mistake that most people make by not identifying themselves. Some claim as investors and they actively buy and sell while some say that they are traders yet they stick to one stock for a very long time. Identifying what kind you are and sticking on the things that you should do is very important in achieving success in a bearish market.