The Indian stock market had been bearish for a long time before the bulls finally took charge in the last week of August. Economists and market experts were fearing a full economic slowdown and were also indicating to an onset of recession in India, when certain announcements by the government revived the spirits and pumped some capital into the markets helping the indices to recover. However, economists are not completely sure on whether this will be able to fully bring back the economy on its feet or not.
While its relatively easy to trade in the bullish markets where the capital is growing with each upturn of the market, the bearish markets can be a tough nut to crack with the capital falling with each passing downturn. People lose money in the stock markets when such scenarios approach. The sellers become stronger than the buyers and the prices of shares fall.
However, the bear markets of slowdowns give traders and investors valuable lessons in trading which can be explained as under.
1. Never Invest in One Sector
Even in the slowdown which was witnessed in July-August, there was the IT sector which was performing well. As Auto and Banking sectors collapsed, the IT sector’s investments were relatively safe. Hence, in case of a slowdown, a well-diversified portfolio can go a long way in helping a person cut back on the losses.
2. Keep Your Stop Losses in Place
The golden rule of disciplined trading is to place a stop loss on your trades. A trader’s discipline is tested the most in a condition where the markets start falling amidst possibilities of upward trend. Placing a stop loss on trades is highly important in Bearing markets where condition may turn choppy at any point.
3. Invest in Debts and Fixed Return Investments
When Bears take charge, it would be beneficial for investors to park their funds in safe havens such as debt mutual funds and instruments or gold and silver. In the recent crash, the rising prices of the yellow metal suggested that people were scared of the downfall in the markets and wanted to put their money in Gold so that it would remain safe. This led to a hike in the Gold prices, which reached Rs. 40,000 per ten grams for the first time.
4. Avoid Anchoring
When a particular idea or mindset affects a person’s future decision-making abilities, it is called anchoring. In such cases, a person finds it difficult to adjust or change their views to new developments in the markets. In some cases, it makes a person highly risk averse which makes them ignore the potentially high performing stocks. This should not happen to a successful trader and would be an important lesson to learn from slowdowns.
5. Avoiding The Disposition Effect
This behavioural bias refers to two scenarios- selling a winner stock too soon and holding on to a losing stock for too long. While the possibility of stock price falling from its highs and bouncing from its lows is always present, a person must realize when is it too soon to exit from a rising stock and when is it too late for the same. A certified investment advisor can help you understand these points if you are new to the stock markets.
Any crash or slowdown in the economy leads to risk aversion and a fear in the minds of a trader, but a successful trader is only the one who gets greedy when the markets fall and gets fearful when the markets rise. Hence, one must never simply be influenced by the changing circumstances, but purely look for profit making points along the curves.