Events and movements in the stock market can be divided into two polar states: a bull market and a bear market. First, note that the stock market should not be confused with the Forex market.
What is a bear market?
Formally, the market is bearish when the quotations of major indices have fallen by 20% or more from the previous maximum for at least 2 months. Basically, the world is guided by the US Stock Market Indexes. Most often this condition appears against the background of the recession in the economy, but sometimes it can be caused by political or military problems, monetary and tax policies.
Investors’ pessimism grows amid worsening stock market data, which often leads to panic sales of securities in portfolios. This is further exacerbated by the closing of margin positions by amateurs trading on borrowed money. This is a normal phenomenon in the cyclical development of the economy and there is no need to be afraid of it.
Differences of a bearish trend from a bullish trend and correction
A bull market is characterized by high point market dates and contrary events: the growth of stock quotes by 20% or more from the previous local minimum and lasting for more than 2 months.
Another difference is speed of movement and volatility. The bearish phase is accompanied by panic, so the movements are accompanied by high volatility and large intraday movements — the investor is frightened and presses the SELL button at the slightest whiff of wind.
Looking at the long term, bull market periods are longer and longer in duration, so if your portfolio is prepared for cyclical declines and you have a clear plan of action, you can easily turn negative sentiment into opportunities for yourself.
How do you distinguish a bearish trend from a correction?
- They differ in the depth of the decline. Thus, a correction is a decrease in quotations within 10-20% of the previous local maximum.
- A correction is less long and, as a rule, lasts for less than 2 months.
- A correction may refer to a specific asset, while a bear market is used to indicate a movement.
- Any correction can begin a bearish trend, so analyze the developments. The duration and depth of quotes decline during a correction is shorter, and therefore the recovery is faster and this is the time to buy assets for long-term investors — the “buy the deep” rule.
Work with your risk assessment to avoid a steep peak in your portfolio.
Futures Market — what to do and how to trade?
Remember, the two fundamental rules are diversification and regularity of investment. Even when the market is in a bearish phase, be disciplined and stick to your buying strategy. No one knows where the bottom will be, but by investing regularly you will make sure that you have an effective position formation price.
How to reassure yourself and act wisely by using stock market data in trading?
- First, as trivial as it may sound, do not panic. Remember, 50% of failures are caused by ill-considered, impulsive transactions.
- If you have margin positions open (with borrowed money) — close them. Ideally, margin trading should be within clear limits of potential returns, and maximum allowable losses, so pay enough attention to risk management.
- Conduct a portfolio audit: which assets are appropriate for the current circumstances and which should be rebalanced because they are not appropriate for the current environment.
- The portfolio should be rebalanced to include protective assets that will be subject to the least pressure, or generate stable cash flow while waiting out declining prices and increased volatility, and the cache that will be needed to buy when you don’t want to buy at all.
- Creating a hedge for your portfolio. Such a hedge is a position that has an inverse correlation to the underlying asset. So, for example, if you are a long-term investor and your portfolio consists of long positions in stocks and bonds, then a hedge for you will be opening short positions or buying reverse ETFs. You can also hedge your portfolio with derivatives — Futures Market and options. For example, by purchasing a PUT option, an investor buys the right to fix the current price of an asset for its possible future sale.
How do speculators trade using stock market data?
The principle of speculative trading is exactly the opposite. If in the growing market traders buy assets on drawdowns and fix profits on a rebound upwards, here speculators, short stocks and indices on the rise to resistance levels and repurchase positions on the resumption of correctional movements.
Such a trading strategy has brought significant profits for traders in 2022. However, it is worth bearing in mind that short positions are associated with an additional level of risk and holding costs. While a long-term investor can always sit out the “hard times” without incurring any additional costs for long positions, this will not work for shorts, as the interest on the securities loan will systematically decrease the account size.
Also, it should be kept in mind that historically, in the long run, the stock market tends to grow rather than fall.
