A lot of traders (I used to be one of them) panic when the market is going down. At the bare minimum, if they don’t panic, they get a little depressed.
Because they think they can’t trade when the market is going down. And if they can’t trade, they can’t make money. These traders are called long biased traders because they only trade in one direction.
And, for them, bear markets are the worst.
The trouble is, of course, that there are two other directions that the market can trade in besides up.
Learn To Trade All Market Environments
If you want to be a professional trader you should learn how to trade a variety of different market conditions and you should have a plan of attack for all of them. Up, Down, Sideways — you can profit from all of them if you’re willing to do the work.
For now, here are 3 ways you can profit when the market is going down:
1. Go Short
Here is the obvious choice — when the market is going down, you can go short. As in you can bet that the price of a stock is going to go down in the future. And if the indexes are all going down, then you know from reading this site that 3-4 out of 5 individual stocks will also be going down.
To help give my readers a better understanding of going short, a while back I created The Ultimate Quick Start Guide to Shorting Stocks.
You can find that guide here.
2. Trade Inverse ETFs.
Inverse ETFs (exchange traded funds) are a great way to trade short without actually “going short” and it’s a great way for long biased traders to stay in the game when the market is going down. Here’s how they work:
Inverse ETFs track in the inverse of the market. For instance, when the IWM (the Russell 2000 small cap index) is going down, the ProShares ETF RWM goes up.
For a starter list of Index ETFs and inverse Index ETFs, click here.
3. Stay Out
I know, I know — at the beginning of this post I said that traders should learn to trade all sides of the market. But, if you don’t feel comfortable doing that, then guess what — cash is a position!
If you stay in cash you are saying the market is not favorable at this time — and that is a perfectly legitimate position.
While you won’t exactly be “profiting” from this position, you will certainly not be losing money which, in some cases, can be just as good.
So there you have it, 3 ways to profit when the market is going down.
Sure, bull markets are awesome (they’re my favorite as well) but markets just aren’t going up all the time and learning how to trade the other types of markets can always be a good skill to poses.