Day trading when the market is going down requires a different set of strategies and a disciplined approach to risk management. Here are some ways to navigate day trading in a downward market: Many people have difficulty with the psychological concepts involved in trading a declining market.
One bright spot is that the market tends to fall at a more rapid pace than it rises and larger profits can be realized more quickly.
As day traders we cannot afford to sit on the sidelines on the days when the market is not going up. In fact its best to take a neutral view on whether the market is rising or falling. Your goal should be the ability to profit in any market.
Strategies
- Short Selling: This involves borrowing shares to sell at a higher price with the intention of buying them back at a lower price. This strategy profits from declining stock prices. This will be the number one strategy for any market going down.
- Inverse ETFs: These are exchange-traded funds designed to perform inversely to a particular index. Buying these can be a way to profit from a declining market.
- Put Options: Buying put options gives you the right, but not the obligation, to sell a stock at a predetermined price. If the stock price falls, the value of the put option increases.
- Counter-Trend Trading: Look for short-term upward moves in a generally downward market. These are often called “bear market rallies” and can be profitable if timed correctly.
- Scalping: This involves making a large number of small trades to take advantage of tiny price gaps that are usually created by order flows or spreads.