MORE: Bear Market Trading
Whether the last 6 up days represent the continuation of the bullish trend begun last March or is merely a bounce from the sell-off begun January 20, every trader must prepare for, and expect Bear markets. They are an essential component of the investment process. They “correct” the excesses when markets experience hugely over-bought scenarios. As a trader it is vital that you remain calm so that you can survive the bear by adopting a few basic rules.
* Do not average down: A bull market can bail you out of a poor investment idea, but a bear market will destroy your bad ideas.
* Under no circumstances should you use leverage of any kind: That means no margin accounts and no borrowing from a financial institution to buy stocks or mutual funds.
* Learn when to sell. If you prepare an exit strategy and enter stop loss orders as soon as you make that purchase, averaging down on losers never becomes an option.
* Avoid new products: Mutual fund companies are constantly releasing their the current “must-own” product, be it technology, income trusts or commodities. The problem here is timing because they usually come to market at the top of the bull cycle because that is when they have the greatest sales appeal.
* Avoid complicated strategies: In a bear market, some investment advisers will promote complicated option strategies such as bull and bear spreads, butterfly spreads and straddles. These are usually big commission generators.
* Avoid retail initial public offerings and/or bought deals
