The most popular advice given to novice traders by savvy speculators is: "Do not trade in a bear market." However, few traders follow it. We have compiled some useful recommendations for you. We hope that they will help you avoid severe losses if you decide to take a risk and trade in times of market uncertainty. Follow your trading strategy.
It would be unwise to promptly sell off depreciating assets just because everyone does it. If you are a long-term investor and there are instruments in your portfolio that you do not particularly like before the decline, do not rush to get rid of them. Impulsive trading decisions lead to losses. It is better to stick to your initial strategy and act according to the plan.
Refrain from active trading.
Traders say - the smaller the timeframe, the more difficult it is to develop a good strategy. This is why you should avoid short-term trades at least for the period of a volatile bear market, especially if your strategy was not effective earlier. Another option is to try to lower the volume of short positions for a while. It will help you realize whether you will be able to earn by going short. As a rule, short selling is difficult for beginners. For this reason, only professional traders make a hefty profit in a bear market.
Hedge your position.
Investors hedge their active position by taking trades in other instruments with absolutely negative correlation to the main asset. This step helps offset the underlying risks. They are the following hedge assets:
short selling;
currency pairs;
ETF;
futures and options.
For example, you can buy a PUT option, which gives you the right to sell an asset at a specific price known as the strike price. If the bears take the upper hand, you will be able to sell the instrument at its initial price as if there was no decline.
Invest fixed dollar amount on target asset
This approach is called Dollar Cost Averaging on Wall Street. It involves spending a small, fixed amount on a particular asset at regular intervals without taking into account its current price. At a lower price, you buy more assets than at a high one. As a result, the average cost of a trading instrument is getting smaller every time. This strategy helps you reduce the risk of investing large amounts of money in one asset during market turbulence.
On the chart, a downtrend looks like a downward line. At the same time, each of its next price extremes (highs and lows) are located below the previous ones.
The bear market is accompanied by pessimism. Traders are skeptical about the prospects of the asset and expect its price to fall.
Usually a downtrend is short-lived compared to an uptrend. Historically, most of the time, markets are rising, not falling.
The main signs of a downtrend are high supply and low demand.
The bearish trend is usually fueled by a recession (a contraction in production, a slowdown in GDP growth, and high unemployment).
In a bear market, volatility is high.
A downtrend is an inevitable and essential part of the economic cycle, so you should not be afraid of it.
It would be unwise to promptly sell off depreciating assets just because everyone does it. If you are a long-term investor and there are instruments in your portfolio that you do not particularly like before the decline, do not rush to get rid of them. Impulsive trading decisions lead to losses. It is better to stick to your initial strategy and act according to the plan.
Refrain from active trading.
Traders say - the smaller the timeframe, the more difficult it is to develop a good strategy. This is why you should avoid short-term trades at least for the period of a volatile bear market, especially if your strategy was not effective earlier. Another option is to try to lower the volume of short positions for a while. It will help you realize whether you will be able to earn by going short. As a rule, short selling is difficult for beginners. For this reason, only professional traders make a hefty profit in a bear market.
Hedge your position.
Investors hedge their active position by taking trades in other instruments with absolutely negative correlation to the main asset. This step helps offset the underlying risks. They are the following hedge assets:
short selling;
currency pairs;
ETF;
futures and options.
For example, you can buy a PUT option, which gives you the right to sell an asset at a specific price known as the strike price. If the bears take the upper hand, you will be able to sell the instrument at its initial price as if there was no decline.
Invest fixed dollar amount on target asset
This approach is called Dollar Cost Averaging on Wall Street. It involves spending a small, fixed amount on a particular asset at regular intervals without taking into account its current price. At a lower price, you buy more assets than at a high one. As a result, the average cost of a trading instrument is getting smaller every time. This strategy helps you reduce the risk of investing large amounts of money in one asset during market turbulence.
On the chart, a downtrend looks like a downward line. At the same time, each of its next price extremes (highs and lows) are located below the previous ones.
The bear market is accompanied by pessimism. Traders are skeptical about the prospects of the asset and expect its price to fall.
Usually a downtrend is short-lived compared to an uptrend. Historically, most of the time, markets are rising, not falling.
The main signs of a downtrend are high supply and low demand.
The bearish trend is usually fueled by a recession (a contraction in production, a slowdown in GDP growth, and high unemployment).
In a bear market, volatility is high.
A downtrend is an inevitable and essential part of the economic cycle, so you should not be afraid of it.
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