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Friday, May 19, 2006

What To Do In A Bear Market.

For the first time in quite a while, we are seeing signs of a bear market.

Whether or not it turns into a full-grown Grizzly Bear or just an intermediate pullback in
the new bull market that started in 2003 remains to be seen. But I thought it might be
appropriate at this point to offer some bear market commentary. Here are my thoughts about
what to do in a bear market.

The first thing, and possibly the simplest (and maybe the wisest!), is to simply sell
everything and go to cash. If you don’t know anything about put options strategies, or how
to sell short, this is definitely the most prudent thing you can do.

And this is where knowing your sell stop – the price that indicates you were wrong in your
trade setup assessment, or a place where you will nail down your profits, is essential. You
must have a price in mind where you are automatically out of your stock in these situations.
With cash in hand, you are in better shape mentally, not having to worry about “where the
bottom is” for all of your stocks. Cash is a position!!!

At this point, you should NOT lose touch with the market. You need to analyze the market
averages each and every day for possible bottoming action. After all, once your analysis
signals a bottom is in place, you can test the waters with a few “probe trades” – just
buying a few shares at a time – to confirm the bottom is in place – and not miss a possible
explosive move off the bottom.

Look for stocks that have held their own, or have even reached new highs, in the market
pullback. Quite often these turn out to be the new market leaders when the general market
turns back around. Because just think, if these stocks are that powerful in a weak market,
what could they do in a stronger market?

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