4 Things to Do During Downtrends

10/14/2014 6:00 am EST

Focus: STRATEGIES

Joseph Fahmy

Managing Director, Zor Capital, LLC

Joe Fahmy of JoeFahmy.com outlines the four steps he feels are crucial for the trader’s survival during downtrend periods.

This article is mostly for traders who vary their investment levels. If you are a passive long-term investor who is fully invested at all times, just realize that there are sacrifices. In other words, you might ride things up or down longer than you expect. That’s why it’s important to define yourself and have conviction in your strategy.

Right now, the market is going through a downtrend. Some people call it a correction, a Bear Market, a correction within a cyclical Bull Market. I don’t care what term you use. I prefer to keep it simple and use the terms uptrend and downtrend. Here are some things I do to help me survive these periods.

  1. Raise cash: Remember that four out of five stocks move with the general direction of the market. When the market is under distribution, even the strongest companies can get hit. For example, during the 2008-2009 financial crisis, Apple (AAPL) dropped from $200 to $80 (split adjusted) and that was when they were starting their strongest product cycle in history. There is nothing wrong with keeping some cash on the sidelines for healthier conditions. You don’t have to be 100% invested in the market 100% of the time.
  2. Keep positions light: If you normally buy 1,000 shares, there is nothing wrong with buying 100 or 200 shares. One reason is that it allows you to scale into some stocks you might like longer-term. Another reason is that smaller positions help you deal with higher volatility. That way, you don’t get stopped out of everything and get chopped to death with the wide market swings.
  1. Keep a watch list: When we start a new uptrend, it is important to be ready to pounce on the strongest stocks out there. For example, after the March 2009 bottom, Keurig Green Mountain, Inc. (GMCR) and Netflix, Inc. (NFLX) were two of the first stocks to emerge to new highs and they went on to become huge winners.
  1. Protect your confidence: Don’t underestimate the importance of keeping a strong mind during these downtrends. I used to get discouraged and think we’ll never see an uptrend again. Now, I am highly encouraged because I know with 100% certainty that we will end this downtrend with a brand new uptrend. The key is to protect your confidence so that you are ready to take advantage when we see healthier market conditions.

By Joe Fahmy, Trader and Blogger, JoeFahmy.com

Related Articles on STRATEGIES