Bear up: 4 strategies for tackling a dipping market
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, it means we have a bear market.
The financial market experiences cycles of ups and downs, but traders can find opportunities well in both cases. How do you navigate downtime? Continue reading about how you can too take advantage of a dipping market.
What is a bear market?
A market is said to be bear when financial instruments’ prices continue to drop over time. Typically, it refers to a scenario in which market sentiment, wars, pandemics, political crises, and shifts in an economy may cause a decrease in the value of instruments. There are times when 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.
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.
Market corrections are common and can turn the table upside down Corrections happen for different reasons, such as a negative economic report or poor earnings report issued by a high-profile company.
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How to weather dipping markets and take advantage of it
Bear markets, like bull markets, can provide many trading opportunities because of the increased volatility and speed of market movements. Such events can be very useful indicators for traders.
It’s, of course, important to be aware of fake news and a general market trend that can sometimes douse fear and emotional trading.
Taking advantage of a bear market involves taking a step back, maybe reexamining your portfolio, paying attention to news and reports, considering using leverage, maybe going short, staying put, or even buying more of a particular derivative.
The next are four strategies to keep in your arsenal while trading the bear markets
- Diversify your portfolio
Whether or not there is a bear market, diversifying your portfolio to include various instruments is a valuable tactic. Similar to how there is no sure way to forecast when a bear market will end, it is likewise challenging 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, and be sure to get to know the instruments you want to trade. That’s
Quality trading education is handy, and you should utilize it if your broker offers it as a service.
- Dollar-Cost Averaging (DCA)
Dividing your reserve cash into smaller sums and engaging in several 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 can lessen the effect of volatility while purchasing a significant number of instruments all at once.
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.
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.
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.
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 usually 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 risk, investigate other instruments, consider stablecoins, follow the news closely, and look for buying opportunities to strengthen your long-term profit.
This information is written by Klips. The information is provided for general purposes only and does not consider any personal circumstances or objectives. Before acting on this material, you should consider whether it is suitable for your circumstances and, if necessary, seek professional advice. No representation or warranty is given as to the accuracy or completeness of this information. It does not constitute financial, investment or other advice on which you can rely. Any references to past performance, historical returns, future projections, and statistical forecasts are no guarantee of future returns or future performance. Klips will not be held responsible for any use that may be made of this information and for any consequences that may result from such use. Hence, any person relying on the information on this page does it at their own risk.