Trading in the stock market with short positions for a bearish view is realistically the same as trading with long positions with a bullish outlook.
In a bear market, there is generally a swing from high investor optimism to widespread investor fear and pessimism which causes a lot of over-reactions, which then get corrected. It is important to understand that bear markets are natural part of a market cycle and not only can one survive them, but can also position themselves to benefit from them.
Bear markets are cyclical, and typically shorter than an average bull market. However, this is quite different from a market correction. Actually, a bear market is when prices fall 20 per cent or more from recent highs, signalling pessimism and a negative outlook among most market participants.
Undoubtedly for traders, a downturn or bear market offers great opportunities. The intensity of a falling market is always greater than when it is rising. It attracts short-term traders to benefit out of it by using different bear market trading strategies.
Especially while trading in options, VIX plays a major role, and it provides extra benefit for option traders in a falling market or in bear market. A great way to protect your portfolio from losses is by using options contracts to buying naked Puts or doing a Bear Call Spread.
Additionally, margin and leveraged trading can benefit traders equally. Besides shorting futures contracts, shorting individual stocks and buying inverse ETFs are some of the options that can help traders sail through a bearish market.
Importantly, trading of news is also worth keeping in mind in a bear market, as news tends to have a bigger impact when the market is in panic. Many a time, the market rallies higher after a news release or government intervention. Ultimately, such spikes provide great opportunities to traders to short the rallies in a long-term downtrend.
Hence, some people tend to call bear markets a traders’ paradise, which may be right to a certain extent. Remember, trading is about trying to make a profit between two different price levels.
One needs to understand that just like a bull market, bear markets too provide lots of trading opportunities due to the added volatility and speed. Undoubtedly, these can be extremely handy and profitable tools for traders under the right circumstances. However, it also comes with a fair share of unique risks, and traders should keep those risk factors in mind while trading in a bearish market.
Chairman and MD, SMC Investments and Advisors
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