The worst part of the stock market is that at some point it does have to head lower. Whether that is just for a little or a prolonged trend, each instance requires a certain way to play the market in order to remain profitable, or not lose as much money.
While each down market is individual in what to expect, they all usually entail the same aspects: volatility, unpredictable reaction to news, and brief rallies.
Using the above knowledge, I have crafted some guidelines that I like to implement within a down market to be able to trade another day.
1. Become more active
When the market is going up it is obviously easier to hold onto your stocks. On the other hand, when the market is going down, holding on to stocks can result in massive losses or requiring you to hold on to a stock longer so it becomes profitable.
Either way you look at it, holding on to most stocks in a down market doesn’t have too many positives. So why not become more active?
Sure, you don’t have to become a day trader, but you’ll want to take advantage of any green you get. Moreover, sitting on your hands ultimately does nothing but drain your account balance.
2. Don’t add more cash
“I’m down X amount, but if I add some more cash and pick up more shares of Stock Y, then I will make it all back” (Avoid this statement).
The biggest trap that consumes stock traders is “spotting opportunities.” Just because a stock is 50% off is current 52 week high does not mean it is a great buy. For all we know, the stock is not done dropping or it was highly overvalued when it originally peaked.
Resistance the temptation to add more cash so you can buy those “cheap stocks.” Play with what you have. Are you ready for more money?
3. Use limit orders
Limit orders allow you to specifically put in a price at which you would like the transaction to take place at.
In a volatile market, stocks can jump up and down pretty quickly. If you just use a blind market order, then you are putting yourself at risk of buying a stock at a value (much higher or lower) not conducive to a profitable trade.
Learn about the different type of market orders.
4. Use strict stop losses
In an up market, letting stocks dip a little further than your normal stopping points is common, but in a down market this same practice can cause you more losses.
In a down market, it is key that you use strict stop losses. If the price is met, than drop the stock and move on. There is no guessing to how long it would take for that stock to come back up.
Below every support is another support.
5. Be weary buying on rally days
Just like you might have down days in a bull rally, there will be up days in a bear rally. These are usually the days when your due diligence pays off. You don’t want to be buying stocks on these up days, rather you should be selling the stocks you have already been holding.
The worst thing you can do is buy at a top.
6. Stay away from earnings
While I already admit to having no clue how to play earnings, how traders react to news, in a down market, is even more unpredictable.
Sometimes traders will sell any news, even if the company beat expectations. Other times a rally will occur because it wasn’t as bad as people expected.
Save yourself the worry and just stay away from earning plays.
All in all, while nobody likes a down market, it shouldn’t mean the end of your trading career. Careful maneuvering and awareness of the risk factors should help you navigate the treacherous water that is the down market.
What do you like to do during a down market? Leave a comment below.