The recent negative price action in the market has shaken some investors, leaving some of their positions in the negative. During a bear market, investors must be savvy and employ a tactical strategy to protect their capital. Below are a few tricks and tips any trader can utilize to protect their capital during a bear market.
Assess Your Short-Term Positions and Risk Tolerance
If the market is falling, you’re going to hear about it in the news. Once you get whiff of the market declining, look at your current positions and see where they stand. We like to look at each position and see how much of a ‘profit cushion’ we have, if any. If you’re 100% sure of an incoming market crash or an immediate bear market than it might be a wise idea to liquidate your short-term positions with low profit cushions.
Average Down Costs on Long-Term Positions
Also known as dollar-cost averaging is a strategy involving buying more stock as the price declines, making your average cost per share lower. This is useful for maintaining your long-term positions when the market is in decline.
Go Against the Grain
If the market is going down, it might be worth investing in some inverse instruments. Inverse exchange-traded funds give you exposure to positions which profit when the market declines. Investors can also turn to futures and options to bet on the decline of the market and get some profits out of it.
Just because the market is in decline does not mean you don’t have to trade. If you trade, the best thing to do is be extremely cautious and ready to exit at any time. Since the market sentiment is bearish at the time, prices could drop at any given moment. To stay ahead of the game set a stop loss order on your short-term positions to liquidate if losses get too severe.
Buy the Bottom
The bear market eventually must end, as it has done in history. When the bear market is coming to an end, begin to make a list of companies you want to buy into. From there keep a close eye on these stocks, looking for technical indicators for the bottom of the down trend. Continue to keep an eye on indexes to make sure the bottom is near. It is near impossible to call the true bottom so make sure you layer your orders accordingly as to not buy too high.
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