It is a common belief that in a bull market, anybody can make some money when trading shares online. However the really good traders come to the fore when the situation shifts to a bear market.
Just to clarify, a bull market coincides with a time of enhanced investor confidence and as the share market is built mostly on optimism (and pessimism), a bull market usually precedes an economic recovery.
Conversely a bear market is typified by a general decline in the overall market over a period of time, usually measured in months, and will indicate a significant market correction.
During a bear market, many traders struggle to make successful trades and it was Charles Dow (half of the original Dow Jones Company) who famously said that bull and bear markets are defined by an investor’s trading mindset. So how can trading shares online still be profitable when the market is in a decline?
The very first thing to do when it is obvious the market is declining is to accept the fact and start thinking about what actions you need to take. There is no point in delaying, or hoping things will improve without doing anything, or worse still, looking for excuses and casting blame where none is warranted.
The way to capitalize on a significant negative market shift is to realize you need to trade your way back to profitability and you are the only one to do it. The sooner you adopt this approach the better for your overall position because if the bear market continues, your losses could multiply to a dangerous point at a time when you can still make money by acting decisively.
The second point to remember is that as you always trade with the upward trend when a bull market is running and so reap the benefits, in a bear market the market goes into a consolidation phase and a different approach is needed.
As the market turns bearish, the trends are either of a limited duration or move in a sideways direction. This introduces the notion of range trading where prices tend to oscillate between short peaks and troughs. It is important to correctly time your move from bull oriented trend trading to range trading otherwise you can lose money quickly as a result of the “whipsaw condition”, which is a situation where the price of an equity goes in one direction only to be abruptly followed by a movement the other way.
Based on major market corrections from the past twenty to thirty years, the conclusion is that attentive trading is required during bear markets as the margin of error for a trading signal is significantly lower than for a bull market.
Those traders who are able to react quickly and modify their strategies from longer term trend trading to range trading, which means taking advantage of shorter swings, are more than likely able to continue to make money. Bear in mind (no pun intended), in times like this you need to increase your trading frequency and volumes, as well as accept smaller profits. Obviously this is a far better outcome than holding onto to a failed approach and losing money.
In summary, the key to remaining profitable when trading stocks online in bearish markets is to act quickly so as to maximize your return as shares are sold off and then rebound upwards. Using range trading is an effective and proven way to maintain trading profitability especially as others will be slow to react and struggle to adapt to changed conditions.
To your trading success.