Everyone that has ever traded for a living knows that there are good times to buy and sell. The trick, however, is knowing when the time is right to get in on an upswing or get out of the market before it comes crashing down.
Many retail traders can become emotionally tied to their investments, either buying at the highs too early or panicking when the market falls so much they start selling as soon as one trade goes wrong. This can be emotionally draining and hurt your bottom line as a trader.
The solution to not letting emotions affect your trading strategy is simple: use bull and bear markets to your advantage. Most retail traders know about bull and bear markets but do not know how to use them in their trading strategies. A bull market is one where prices are on the rise, and a bear market is one where prices are on the decline.
The two types of trading strategies in bull and bear markets
There are two schools of thought when it comes to trading in bull and bear markets:
The first way to trade in bull and bear markets is called trend trading. In this approach, you wait for the market to establish a trend (either up or down) and then trade in the direction of that trend.
For example, if you see that the market has been trending downwards for a few weeks, you would short sell stocks instead of buying them. This approach is easier said than done, however, as trends can change at any time.
The second way to trade in bull and bear markets is called contrarian trading. Contrarian traders do not care about trends and instead buy when the market is crashing and sell when soaring. In a bull market, contrarian traders will short sell to take advantage of a falling market, while in a bear market, they will go long on stocks that are dropping fast.
This approach has more room for errors than trend trading as there can be times where you will be forced to hold losing positions for longer than you would like, but it does have one major benefit – you never lose all your money on any one trade.
Even though both approaches work well after studying the price action of thousands of different companies, contrarian trading has proven to be both more profitable and less risky. This is because most retail traders only want to buy low and sell high, not knowing that buying at the highs leaves them little room for future gains while shorting during a bull market is highly risky due to supply and demand. Buyers outnumber sellers in rising markets making short selling expensive (in terms of the fees required).
Risks of using a bull and bear market in your trading strategy
Using an understanding of a bull or bear market in a trading strategy can be risky business because most traders rely on certain criteria such as chart patterns or technical indicators to make trading decisions. Using those factors may not be enough when everyone else is using them as well. Always use stop losses to protect your investments and be aware of what everyone else is doing so you don’t get caught up in any potential “paralysis through analysis” scenarios.
The thing about trading in bull and bear markets is that they are simply tools you can use to earn more money through better risk management. You do not need to know which one you are currently trading in or what stage of the cycle you are in; all you need to know is how to use both bull and bear markets together with your current strategy. If this sounds like something you want to learn more about, then contact a reputable online Saxo Forex Broker and let them show you how to make easy money trading stocks. Try out a demo account and practice your trading skills before investing your own money.