Securities markets that are trending downward are like a good-news-bad-news joke for investors and traders. The bad is we’re almost certainly in bear territory as of early June 2022. The good is that there are plenty of defensive rules for protecting yourself because this is not the first time in history that asset prices have taken a dive. Ask an experienced what those rules are, and you’ll get a hodge-podge of responses. It seems like everyone has their own set of techniques to deal with bearish price trends.
But if you keep asking enough people, it soon becomes apparent that there are at least five guidelines that appear on almost everyone’s list. They are the ones detailed below. Besides playing defense, it’s also important for active traders to get on with their lives, continue seizing opportunities that arise, and understand how to avoid some of the most common pitfalls associated with southward value trends. Before the year is over, there’s a very high chance for low-priced bargains to crop up, so here are the rules, risks, and opportunities to make the most of 2022’s bearishness.
Smart Rules for Surviving in a Bear Market
Nothing is universal, so take the following items with a grain of salt. Some might apply more easily to your trading style than others. Review each one and ponder how it might help prevent losses in your portfolio. If you use any of the trading platforms by AvaTrade, you’ll be well positioned to build a rule-based strategy whenever the need arises.
- Pay Attention to Volume: When prices take a nose dive, watch volume. Many jump in near the bottom and try to find bargains. As volume begins to dry up during a price collapse, that’s a signal that the bottoming out phase is near.
- Use Rules to Remove Emotion: Many people find that using a rule-based trading strategy helps eliminate the human tendency to let emotions take over during fast-paced price swings.
- Follow Multiple Indices: Play a smart defense by using several indices to gauge the strength of markets. Along with majors like the DAX, FTSE, and S&P 500, check out some of the mid-cap indices that include thousands of stocks in their rosters.
- Don’t Be Afraid to Sit It Out: As long as you’re not being guided by pure fear, don’t be reluctant to go to cash and wait out an intense value collapse. Watch volume to estimate when the downhill ride is nearly over.
- Know the 3 Stages of Downward Trends: There’s an initial drop, a fake recovery, and a fall to the bottom. Try to use long-term charts to get a feel for which of the three stages is in play. When phase three is nearly exhausted, it can take months before prices begin to rise again.
Watch Out for Bear Related Risks
One of the most dangerous temptations for active traders when they notice that things start to go bad is to hang on for dear life, hoping that the fall will quickly reverse itself and be a thing of the past. Often, there’s a fake reversal that tricks even the most experienced people into believing that the worst is over. Already, there have been two upticks in May, with looking to have fake written all over them. There’s no sense in hitting the panic button when you have options at your disposal.
Look at your portfolio and if it consists of established blue-chip shares, a few commodities, and perhaps a dash of precious metals, it usually doesn’t make sense to cash out and assume the worst. Before you sell securities, categorize them and decide which ones are more apt to weather the storm. When economies and currencies and exchanges become volatile and show signs of breaking down, double-check your holdings to be sure they’re fully diversified. Even in recessions, some assets perform much better than others. If your holdings span several classes, then diversification can add a layer of protection for the long haul.
Unique Opportunities in Volatile, Down Trending Markets
People often forget that short selling is a very old, sometimes quite effective, way to stay solvent during a financial catastrophe. But what if you don’t want to deal with margin requirements and other broker-imposed regulations? That’s when CFDs (contracts for difference) come in handy. Not only can you use CFDs to speculate on declining prices, but you won’t have to own the underlying assets. Trading CFDs is a simple affair as long as you work with a broker who offers them.