How To Survive A Bear Market

[roshcrazy]

Most traders I talk to nowadays have lost so much money in the markets during the 2000 NASDAQ Bear Market they are ready to throw the towel in. Having watched their portfolios being decimated by over 70% they simply have not got the money or the mental toughness to come back. What a shame. Profiting in bear market is quite simple... when you know how.
On 18th March 2000 My NASDAQ indicator turned into negative territory for the first time. Since then up to today 4th December 2000 it has never gone back into positive numbers. The NASDAQ had now declined 50% from its February high and some of the previous highflying tech stocks have been killed. YAHOO. MSFT, AMZN are all way, way off their peaks. Any fool who had a buy and hold strategy with these stocks has just kissed about 70% of their capital good-bye. Yet not only should you never lose more than 10% of your capital during a bear market you do have alternatives to make a profit.

Option 1 - Safe

When my indicators turned negative way back in March I was already stopped out of many of my high-flying stocks, such as Yahoo, Q-Comm. By strategically trailing my stop behind the price advance I automatically exit when things turn around. But I was still in a couple of long positions when my indicator turned negative. So what did I do? Exit straight away? NO. I simply tightened my stop on these shares. I looked for the slightest excuse to get out. The shares duly obliged for within 1 week of my indicator turning negative I was stopped out. No regrets. I was pleased. Why shouldn’t I be with a 144% gain for the year?

Once I was completely in cash and my indicator on the NASDAQ was negative what should I do? Well let’s ask it another way what could I do?

I was in 100% cash. I had just made a 144% annual gain. The market was turning down. Why not walk away from the markets? Take a break. I don’t have to trade all the time. Simply walk away, check the indicator figure every week and wait for a positive market again before starting all over again. What’s wrong with making 144% during every bull market and sitting out of the market during the bear markets? This is what I would advice every novice trader to do. You must have heard the saying "Any fool can make money in a bull market.." So my answer is "trade only in a bull market" It’s really so simple.

Option 2 - Conservative

Most people are surprised to hear about shares still doing well during bear markets. Yes there are still some great moves. Very few and far between. The moves aren’t as powerful but they are there. Why not cut your position size down in half and go searching for these "exceptional" shares? Use MSTS to ferret out these shares and trade them.

Think about it this way. If you can make 144% during a bull market and 25% during a bear market how rich will you be in 5 years time? You cannot treat every market cycle the same. Sometimes you can’t help but make money. Sometimes you will find it difficult to make money. But as long as you preserve your capital you will always be miles ahead of the average trader.

Option 3 - Aggressive Bear:

If you can make a lot of money on the long side (in the right shares with the right system) during a bull market then why not simply reverse the process? Go short! This is where the easy money is during a bear market.

Which shares should you be looking to go short? Most people like to pick bottoms. These people lose money. Reverse this process. When selling shares most people like to pick tops. Impossible! These people lose money. When trying to sell a share at the top the bullish sentiment causes sharp rallies in the share resulting in stops being hit.

Without a doubt and looking at thousands of shorting candidates I always find the very best time to short a stock is four to six months AFTER it has made a top. Back in September I recommended selling Yahoo at $82. It is now down in the $50’s. Look at AMZN, E-Bay, LU, AOL you’ll see how it is best to short shares AFTER the topping process has taken place.

If you can make 144% during a bull market. 100%+ during a bear market how rich will you be?

The next time you get caught in a bear market don’t hold on to your shares HOPING for a rebound. Way up your options 1,2, or 3 and act accordingly. A bear market can be just as pleasant as a bull market

 

[Akash_arny]

Hey Roshni nice article and really useful, Thanks.............................................

 

[roshcrazy]

What are bear and bull markets?
A bull market is one where prices are rising, whereas a bear market is one where prices are falling. The two terms are also used to describe types of investors. These terms gives a general impression of how the market is doing. This article covers:
What drives bull and bear markets?

How to predict bull and bear markets?

What do you about the conditions in bull and bear markets?

The media as well as investors often use terms such as bull market and bear market. They give a general impression of how the market is doing. A bull market is one where prices are rising, whereas a bear market is one where prices are falling. The two terms are also used to describe types of investors. A stock market bull is someone who has a very optimistic view of the market; they may be stock-holders or maybe investors who aggressively buy and sell stocks quickly. A bear investor, on the other hand, is pessimistic about the market and may make more conservative stock choices. Sometimes, the terms are used to refer to specific funds or stocks. Bear market funds, for example, are those that are falling and faring poorly. Investors sometimes refer to bull stocks to describe securities that are aggressively rising and making their investors money.

Knowing what is meant by the bear and bull market can help you understand whether the market is currently rising or falling. There is no need to get frightened by a bear market indicator; however, as experts agree that the market is cyclical. When prices start falling, they will eventually recoup.

What Drives Bear and Bull Markets?
The stock market is affected by many economic factors. High employment levels, strong economy, and stable social and economic conditions generally build investor confidence and encourage investors to put their money in the stock market. Often, this can bolster bull markets. Also, new technologies and companies that encourage investors to put their money in stocks can create bull markets. For example, in the 1990s, the dot com craze encouraged many investors to put their money in stocks that they felt would keep increasing. In some cases, a bullish market is simply self-perpetuating. Since the market is doing well, it only encourages investors to invest more money or to start investing.

On the other hand, discouraging economic or social political changes in a society can push the market down. Sudden instability or unemployment -- or even fears of unemployment caused by wars and other problems -- can start to make investors more conservative and therefore lead to bear markets. Of course, again this becomes a self-perpetuating trend. As the economy slows down, companies begin downsizing. Increased unemployment makes people far less willing to gamble on the stock market. Sometimes, a panic caused by dire predictions about the market can also create bearish conditions.

How To Predict Bear and Bull Markets?
The easiest way to predict both types of markets is to realize that what goes up must come down. That is, if the market is rising, then you know that at some point it will start to fall again. Similarly, if the market is currently falling, you can be certain that eventually it will pick up again. There are no precise ways to predict either bull or bear markets, although general social economic situations can help you to determine what will happen. A country which wages a war will experience bullish market conditions as government contracts create more jobs and boost investor confidence if their expectation is to win. Sudden international crises push the market downward and create bearish conditions. News is very often a good indicator of where investors are headed. The reports will inform about loss of investor confidence as well as sudden economic downturns that may affect the market. If you notice from stock market research that several indexes have changed by 15% to 20%, you can be sure that market direction is changing. When you notice such changes, it is time to sit up and take notice. You may be headed for a bullish or bearish market.

Market Conditions In Both Cases
While referring to markets is either bull or bear is very general, there are certain types of specific markets conditions that exist in both markets. For example, a bullish market is often accompanied by a sudden increase demand for securities and smaller supplies of the same securities. This is because more investors are willing to buy securities while fewer wish to sell. This, of course, only pushes prices higher. The very opposite is true in a bearish market.

The investor's behavior is another condition prevalent in both markets. In bullish markets, there's a sudden increase interest in the stock market. More people are hopeful about possible profits on the stock market and most people are optimistic about economic conditions. In a bearish market, investors are not very confident and therefore invest less.

Investing During Bear and Bull Markets
New investors often assume that they need to avoid investing during bear markets, and invest heavily during bull markets. This is not the case. Experienced investors know that you need to be able to invest in any sort of market condition, provided that you do so wisely. Each investor has a different strategy for dealing with a bull market or bearish markets. Many investors try to take advantage of bull markets by buying stocks as soon as the market gets bullish, and then starting to sell when prices seem to have reached their peak. The difficulty, of course, is that it is almost impossible to tell when the trend is beginning and when it will peak. In general, investors can take more chances with the market during a bullish phase. Since overall prices will rise, the chances of making a profit are good.

In bearish market conditions, prices are falling and the possibility of loss is pretty good. What is worse, it is not always possible to tell when bearish conditions will end. Therefore, if you invest during such market conditions, you may have to suffer some losses before bullish times return and you're able to realize a profit. For this reason, many investors decide on short selling or fixed income securities and other more conservative types of investment. Defensive stocks are another good option that remain stable during bearish conditions. On the other hand, some investors see bearish market conditions as an ideal time to invest in more stocks. Since many people are selling off their stocks -- including valuable blue-chip stocks -- at low prices, it is possible to set up long-term investments that will prove valuable during bullish times.

While every investor loves to see the upswing in prices during a bull market, the wise investor will be able to handle a bear market as well. Whether you are just beginning to invest or are an experienced investor, learning to deal with various market conditions you neen not panic but decide patiently on investment.