Protecting Ourselves When Market Drops

market plunges

 

 

 

 

 

 

 

Why is it that when the stock prices are climbing ever higher we rarely focus on how much higher they can go?  However, as soon as share prices begin to drop, everyone’s major concern now becomes “Have we hit bottom yet?”  Why is everyone so concerned with where the bottom is?

The Overall Trend Matters

As stock market investors we need to realize that share prices can and will fluctuate up or down and when the predominate overall trend is to the upside you will see that a stock can very quickly rebound after only but a brief drop in price.  So when you have sold your security in a market that is predominately trading to the upside it may happen that once you sell your stock you may see that counter go back up.

However it may also happen that once the stock begins to drop in price now that stock can and will continue dropping in price until guess what happens?  Correct – that downtrend now becomes the dominant trend.  Now buying stocks is no longer a good idea because the very opposite can happen.  The stock, whose overall predominant trend is to the downside, now goes up very briefly only to further resume its overall downtrend.

So now you know the market has what is called “overall trends.”  When the overall trend is to the upside we are in a Bull market and when the overall trend is to the downside we are in a Bear market.  And we don’t know which one we are in until after those market moves have advanced quite a bit.

How to Protect Ourselves In Volatile Times

Obviously no one really needs protection from a market as it is going ever higher!  It is when the market environment is shifting and the overall trend will now be to the downside that we need the most protection.  Here are some pointers:

1)     It is never a good idea to buy stocks that are dropping in price or by adding to losing positions.  We need to realize that is makes better sense to be a buyer of a stock as it is going up in price instead!  Strong stocks have the tendency of getting stronger while the weaker stocks have the tendency of getting weaker.  And who says your stock will rebound when the overall market resumes its uptrend?

2)    Online trading has certainly evolved from when I began trading.  It is so much more sophisticated and the platforms are so much more user-friendly.  In order to generate outstanding returns from the market you need to be aware that nothing matters more than your ability to protect capital while it is invested.  Utilize simple protection orders designed to take the emotion out of your trading.  You will no longer be concerned about market fluctuations – let the protection order what it is supposed to do.

3)    Mr. Warren Buffett said it best.  You cannot time the bottom of the market and you cannot time the top of the market so why try? Realize that lots of money can be made when stocks go up or when stocks go down by learning how to trade options. The premium you pay for the option is fraction of the cost of owning the stock outright.

Obviously being able to enter the market at a low price almost certainly guarantees stellar returns over the next inevitable bull market run.

The following are some interesting data:

  • Going back 60 years the S&P 500 has hit bottom an average of 4 months before the end of a recession
  • Since 1932 the S&P500 has gained an average of 46% the year after hitting a bottom
  • The market rallies well before the end of an economic crisis
  • The month of October generally signals market bottoms

Learn to make money safely when prices go up or down

When you learn how to read the signs of the stock market you will never have to be concerned about how much lower the markets will go because an educated trader knows to take advantage of making money whether we are in a bull market or a bear market profits.  Generating wealth through options trading can be an extremely profitable business (even safer than trading stocks)!

In addition, an educated trader knows that significant market drops (as painful as they may appear at the onset) are essential to the healthy recovery a market will experience when it finally decides to gain momentum and enter the next phase of its inevitable bull run!  A bull market – a bear market — either one gives you an opportunity for the enormous generation of wealth!

If you want to know more about my techniques, you can visit Wealth Mentors. I conduct trainings every quarter in Singapore, Malaysia and Hong Kong.