The current year is turning out to be one of the most volatile and unpredictable in the history of the securities markets and the roller coaster ride is not confined to UK or US indices only. All over the world, the major sector and national exchanges are going wild. When the year began, the general mood of the market was positive, and by all appearances, the long bull run would continue. But when the new year rang in, things started to slide downward for several weeks.
Then there was a short reversal followed by a lower low. That cycle occurred once again, and by the time May rolled around, it was fair to say that a bear market was in the works, even if it had not technically begun.
How can traders and investors get through the coming tough times? The good news is that there are several tactics for surviving, preserving capital, and taking advantage of a downturn.
What are those tactics? In addition to using the best and most sophisticated tools at hand, many try their hand at short-selling, sticking with commodities, going to cash, or day trading.
Here are details about some of the most effective and popular strategies for riding out a downward price spiral in the securities exchanges.
The Right Tools
Working with a reputable online broker is one of the smartest defensive moves anyone can make when it comes to investing and trading. There are many reasons why that's so, but one is related to the sophisticated tools available via the top brokerage sites.
Whether you prefer to use a simple web-based app or one of the more complex offerings like metatrader 5, having the most suitable tools can make a huge difference. Armed with the right stuff, you can place automated orders, leverage the power of expert advisors, set precise stops, and do in-depth technical analysis on every trade.
Keep in mind that no matter how wonderful and powerful your tools are, they can't turn the market around, but they can help you make more informed trades, gather a wide range of information from reliable sources, and automate some or all of your orders.
Shorting
For many amateur and professional investors, short selling is the first thing that pops into their minds when stock charts begin to show signs of bearishness. It's an understandable reaction and one that is fully based on history. Betting that shares prices will go lower can be a smart strategy if you guess correctly.
There are a couple of downsides to shorting. First, many brokers will make account holders go through an official approval process that includes a review of past transactions, balances, etc.Â
Additionally, there are often minimum account balance requirements and special rules that go along with getting the green light from a broker. An easier option for many is to use CFDs (contracts for difference), which do not require any special permission or funding minimums.
Traders who buy and sell CFDs don't own anything except the contract itself. If they make a correct guess about the direction of the next price move, they stand to earn a profit. If short selling is one of your preferred weapons, consider using a broker who offers CFDs.
Commodities
As 2022 unfolds, the midpoint of the year approaches, it's important to remember that a bear market in stocks is confined to equities, by definition. Many institutions, individuals, and governments invest in commodities as a hedge against paper losses on corporate shares.
Commodities like wheat, oil, cattle, and real estate are hard assets, unlike intangible shares, futures contracts, options, etc. Tangibles tend to rise in value, or at least hold their long-term worth, in bad economies. Gold and oil are good examples that both have relatively reliable histories of outperforming intangibles during economic downturns.
Cash
Many of the best personal finance podcasts and other advisory outlets will tell you sometimes the wise approach is to do nothing. If you don't feel confident enough to trade during a bear session, there's always the option to pull out and go to cash until the situation turns around.
It's probably not so surprising that there are vast numbers of individuals who simply refuse to buy, sell, or hold securities during troubled economic times. There's a compromise solution that consists of continuing to trade but only using half of your account capital. It's a conservative approach that aims to preserve financial liquidity but pares down the amounts invested.
Day Trading
Day traders don't fear roller coaster price swings. In fact, they prefer intraday price changes so they can potentially gain more on each transaction. By definition, day traders cash out before the closing bell. Their goal is to specialize in just a few corporate stocks and take profits on very short-term changes in value.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
