How to approach a bear market
As mentioned, the price action during a bear market is driven by fear. Investors fear prices will fall further, while short-sellers fear prices will rise. Neither are focused on prices but on their potential losses.
Smart investors focus on the price and the types of stocks they are buying. The first thing to do is to make sure you are never in a position where your decision-making is driven by fear. You can use stop losses and diversification to limit your losses so that you don’t panic. When prices decline a lot, you should use the opportunity to buy high-quality companies that can withstand a recession, and that are trading at attractive prices.
As a trader, you should be looking for potential short squeezes to go long, and then take profits when momentum slows. The best time to open a short position is after a squeeze when prices are too high and begin to fall again. A dead cat bounce is also a good opportunity to go short as it proves that prices have further to fall.
The most important point to remember is to avoid making decisions based on fear. This will allow you to read the market clearly and make rational decisions to take advantage of irrational price action.
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