The Quintessential Bear Market Guide
March 21, 2022 (Investorideas.com Newswire) Whether you're a seasoned trader or a novice investor, you're going to need to master how to trade during a bear market. Bear markets can be incredibly scary for novice traders, but it is an essential experience that will emphasize the risks involved with any form of trading.
Bear markets are a natural occurrence in the world of finance. This entails that there are solutions that enable traders to not only mitigate the adverse impact of these price movements, but to also take advantage of them. Below is a bear market guide to help novices survive.
What Is a Bear Market?
A bear market refers to any drop equal to or greater than 20% from an asset's recent high point. While this term is commonly used to describe the performance of the S&P 500, this can also apply to the market in general. (The S&P 500 serves as the primary indicator stock market performance)
While "bear market" and "market correction" are used interchangeably, they each refer to different situations. While both these terms refer to a negative market performance, a market correction refers to a dip of up to 10%, while a bear market refers to a dip of over 20%. The latter is far worse.
Dollar Cost Averaging
Dollar cost averaging is a tried and tested trading plan wherein investors manage risk by purchasing an asset in similar amounts over a period of time as opposed to spending their whole investment capital in a single transaction. DCA allows traders to benefit from buying low, while also giving them the option to stop investing should the asset dip even further. This is also the perfect strategy for novice investors who are trading for the long-term.
Capitalize On Short Rallies
Even during bear markets, assets will experience short increases in value. The idea here is to buy assets during a short dip, and to sell the same assets during a short increase. This cycle is repeated throughout the duration of the bear market or until a new trend is established.
It's important to know though, that the more you trade, the more risk you're exposed to. This is why the majority of traders simply opt to switch to safe haven assets instead to retain the value of their portfolio until market conditions improve.
Switch to Safe Haven Assets
Safe haven assets are assets that hold value over time regardless of market conditions. These assets even increase in value during bear markets. These assets are ideal for traders who have already amassed a high value portfolio. Popular safe haven assets include gold, treasury bills, defensive stocks, and cash.
An argument for Bitcoin as a safe haven asset can also be made, but the technology is still relatively new. Even when Bitcoin adoption has been on a major surge in recent years, its volatility is what makes it remain a risk asset.
Bear markets are a natural occurrence, much like storms. It's really a matter of weathering them and surviving to trade under better conditions. Regardless of your measure of choice, it's important to acquire your assets only from a reputable online brokerage.
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