Bearing up: 4 strategies to taking advantage of a dipping market 

4 illustrations of bears

Motivational speakers often say, “Life is full of mountain top and valley moments. When you’re high up, enjoy it. When you’re down below, stay strong and cautiously navigate.” This is also true for trading. 

When the market is green and everyone is happy, we know it’s a bull run. When the colour turns red, faces turn pale, and everyone is cautious because it is a bear market. 

The financial market experiences cycles of ups and downs. Panic often sets in during downtimes, but how do you navigate downtime? Continue reading as we consider taking advantage of a dipping market in this article.

 

What is a bear market?

A market is said to be in a bear market when financial instruments’ prices continue to drop over time. Typically, it refers to a scenario in which widespread pessimism and economic decline cause the broader derivatives market values to trickle down by 20% or more from recent highs. 

There are generally two types of bear markets; minor corrections and full-fledged bear markets. A correction is when the broader derivatives market, such as the S&P 500, declines more than 10% from its recent highs. 

Corrections are common and can typically be seen several times a year. Corrections happen for different reasons, such as a negative economic report or poor earnings report issued by a high-profile company.

 

 

A full-fledged bear market is more significant. It happens when the derivatives market, like the S&P 500, declines 20% or more from its recent highs. However, these types of bear markets often occur infrequently. 

A bear market is usually associated with investor pessimism towards the future of an economy, corporate profits and general derivative prices. 

Sometimes, a bear market indicates an incoming recession, where a recession is defined by two consecutive quarters where a country’s Gross Domestic Product (GDP) stays negative.

Bear markets are often tied to a slowly declining economy and investor sentiments, characterised by reduced production, unemployment, low average income, low profitability, wars, pandemics, political crises, and drastic shifts in an economy (such as a move from a physical to a digital economy), also contribute to a bear market. 

 

The bear market duration is not predictable, as some would last for a few weeks, while others could last for years. The market is largely reactive to external factors such as the unemployment rate and jobs report, consumer price and produce price indexes, Gross Domestic Product (GDP), etc. It would only be conditioned in a particular progression for as long as the external factors remain constant or intensify in an upward or downward stride.

As a trader, you might wonder if a bear market is completely harmful to you and should be avoided at all costs. Well, the first thing to settle is that bear markets come naturally with a market cycle and are unavoidable. You can only position yourself to survive them and possibly gain from them. 

 

As a trader, you must realise that bear markets, just like bull markets, can provide many trading opportunities because of the increased volatility and speed. In the correct situations, speed and volatility can be very useful and profitable tools for traders. However, it also has a fair share of particular risks, and as a trader, you should be aware of those risk elements while trading in a dipping market.

Black man looking at his laptop screen Consider identifying opportunities arising from volatility and speed of market movements.

<<Take advantage of market dips and start trading now>>

 

 

How to weather dipping markets and take advantage of it

The first thing to avoid is panic. Panic often takes over in a bear market, and you can easily see this in how traders pull out funds to “salvage” what’s left, close on losses, sell positions and derivatives, etc. Again, one major way to survive a dipping market is to avoid panic. 

Taking advantage of a bear market involves taking a step back, maybe switching portfolio holdings, paying attention to news and reports, considering using leverage, maybe going short, staying put, or even buying more of a particular derivative. 

After all things have been considered, positives from a dipping market can only happen with a clear head and swift actions. Staying away from unauthenticated news and general market trend sometimes can douse fear and panic trading. 

 

Four strategies to keep in your arsenal while trading the bear markets

Surviving a bear market is possible when you navigate it with the right strategies. There are a lot of things you can bear in mind, but let’s take a look at four strategies.

 

Diversify your portfolio  

Whether or not there is a bear market, diversifying your portfolio to include a variety of different instruments is a useful tactic. Similar to how there is no sure way to forecast when a bear market will end, it is likewise difficult to forecast which instrument will recover the fastest or see a rally once the market has stabilised.

Reducing your trade sizes may be necessary to diversify your portfolio, but doing so will lower your overall risk. Keep in mind that it’s crucial to DYOR and perform meticulous due diligence on each instrument you want to trade.

 

Dollar-Cost Averaging (DCA)

Dividing your reserve cash into smaller sums and engaging in a number of transactions simultaneously. This is what dollar-cost averaging is about. Adopting the DCA method in a bear market means you will be looking for profitable opportunities when prices reach a specific target. By using this method, traders are able to lessen the effect of volatility while purchasing a significant number of instruments, all at once.

 

Stablecoins 

For crypto traders, staying in stablecoins during bear markets is a popular and straightforward approach. Stablecoins are typically significantly less volatile than other cryptos because they are pegged to less volatile fiat instruments.

Stablecoins could be a haven for traders to hold their instruments during unpredictable market conditions while waiting for the market to right itself.

 

Do nothing 

The bears control the market during a bear market, and the bulls have little chance. According to an old proverb, the best action in a bear market is to pretend a grizzly bear has attacked you in the woods. It would be risky to retaliate. You’ll prevent becoming a bear’s food if you maintain your composure and refrain from making quick movements.

Committing more of your portfolio to money market products, such as certificates of deposit (CDs), U.S. Treasury bills, and other securities with high liquidity and short maturities is known as “playing dead” in finance.

Trading short-term funds in equities (such as money for emergencies or bills) is bad. Traders should avoid investing in equities unless they have a minimum investment horizon of five years, preferably longer. You should also never trade with money that you cannot afford to lose. Remember that even little corrections or bear markets can cause significant damage.

 

Conclusion

The economy expands, and the derivatives market typically rises over the long term. This bullish trend may be interrupted by bear markets, but these downturns always end and eventually turn around, setting new highs. You can buy equities at lower prices (“on-sale”) and build up stronger positions by trading during downturn markets.

As a general rule, avoid “panic selling” everything you own. Instead, use this chance to reevaluate your positions, DCA, diversify, calculate your risks, investigate other instruments, consider stablecoins, follow the news closely, and look for buying opportunities to strengthen your long-term profit.

 

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