During bear markets it can be difficult to make money trading stocks using the buy on dips strategy that works so effectively during bull markets. This article outlines an effective trading technique that can make money during bear markets.
Bear Market Dynamics
During bear markets, most stocks are in downtrends. Even during a downtrend stocks can have periods during which they are rising. The key is that every peak is lower than the previous peak and every low is lower than the previous low.
During such bear market periods, investors are generally becoming more pessimistic regarding the future earning potential of both individual stocks and the broader economy. The result is that price/earnings multiples contract leading to progressively lower valuations for individual stocks and the stock market generally.
An Effective Bear Market Trading Technique
During bull markets, buying on dips in share values can be an effective technique as temporary lows are followed by higher and higher share values. However, during bear markets buying on dips can be disastrous to the success of your trading. Such price declines are often followed by further price declines as more investors sell their holdings.
A better technique to follow during bear markets is to sell on price rallies. Such buying interest is often temporary, leading to price declines as selling pressure resumes. Using this approach will often lead to better outcomes for the investor.
