Friday, July 11, 2008

Benefits of trading in a bears markets

Everyone is talking about how terrible bears markets are. They seem to all be wondering the same thing, is it over yet? But there are many ways in which trading and especially learning to trade in a bears market can help you.

1. Stocks tend to go down faster then they go up. I know to most of you that does not seem like a good thing but think about this. If a stock is moving in either direction you can make money off of it. This is done by buying stock and calls when they go up and shorting stocks and entering puts when stocks go down.

If a stock heads down 40% in a month and you shorted it, it would be like buying a stock and having it go up 40%. It is the same thing only backwards. This is the main reason why many professional traders prefer to trade in a bears market.

2. The second reason is that bears markets along with volatile markets happen all of the time. If you are just getting into the stock market it can be to your benefit to learn in a bears or volatile market.

The reason for this is that it paints a more realistic picture of how the market behavior. There are too many people who enter the market when it is bullish and make a lot of money. Then they lose it all when the markets crash. Remember in a bulls market everyone is a genius.

3. On a related note it is very important to always use proper risk management. In a bears market you never forget that, but in a bulls market you may wonder away from that ideal causing you to pick up a very bad trading habit.
I am sure that not everyone agrees with me but bears markets are not as bad as their reputation. They are a natural cycle and come to remind people that the market isn’t just a place where you buy a stock and expect it double in a week.

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