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Trader Q&A: Can You Provide Any Guidance on Trading in a Down Market?

Schwab's Trading Services team provides advice for both bullish and bearish traders.

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Kevin Horner: Well it's going to depend on your comfort to a certain extent. A couple of options for you. If you find yourself as a true bullish trader, that is to say someone who has difficulty recognizing the down trends or trading in the down trending markets, you're not alone. Believe me. It's very difficult for those of us that are very bullish by nature. So if you are bullish I'd say you want to find short term trends and look for profits on a quick basis as opposed to trends that you can ride out. This market at least currently is giving us a lot of meaning resistance and retreating, taking a breather. We haven't really re-established an ongoing trend so I think that's one alternative for you. Secondarily if we're working in a margin account of course where you have to gain approval for short stock ability you can absolutely consider taking shares on loan from your broker and selling in the open market with the intent of buying back at a lower price.

Lou Mercer: So let's talk about that.

Kevin Horner: It's exceedingly risky. Beware.

Lou Mercer: If you believe the stock market is going down you can profit from it by selling stock today with the idea that you're going to buy it back for a lower price in the future. It's a great strategy as long as you're a disciplined trader who can take a loss when the market goes against you. So with Schwab and just about every other brokerage firm out there you will have things like bracket orders where one triggers another or cancels another where you can predefine your walk away point before you get in. And that might help you stay disciplined to that exit strategy.

Kevin Horner: Yeah. But I would only caution that again I think it's an emotional scenario to a large extent. If you feel as though you're bearish by nature you're going to have probably a measure of success greater by trading the bearish side than you would the other side and me as a bullish trader, I struggle with those bearish trades.

Lou Mercer: So what if the S&P takes out at September and August lows there? If it happens and you want to profit from that, yeah, you definitely have instruments out there from shorting stocks or you can by inverse ETFs. But once again have a strategy. Stay defined to your exit point and don't' get stuck in that losing position.

Randy Fredrick: Yeah. It's an interesting topic but what's fascinating is some of the most recent statistics I've seen indicate that only about ten percent of retail investors are ever willing to trade the down side. So they're actually - and I hope this isn't what the question is but what I think a lot of times when people ask that question they're not asking how can I implement short strategies. They're asking how can I trade the long side of the market during the down, during a down market. That's a dangerous game because most people really aren't willing to trade the down side of the market at all, meaning strategies that are intentionally designed as you were just talking about to make money in a down market. Most people just simply won't -

Lou Mercer: And if you look at something like Investor Business Daily they say "Hey. Let's own stocks when the market is going up. When it does down, let's get out of them." I would rather prefer that core and explore view. My long-term boring stuff, my diversified stuff. Ok. I stay long. But yeah, if you don't want to go shorter try to gain from the market going down. Then on your trading portfolio you would just move into cash and wait for the market to move up again.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

When considering a margin loan, you should determine how the use of margin fits your own investment philosophy. Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading securities on margin.

Margin trading increases your level of market risk.

Your downside is not limited to the collateral value in your margin account.

Schwab may initiate the sale of any securities in your account, without contacting you, to meet a margin call.

Schwab may increase its "house" maintenance margin requirements at any time and is not required to provide you with advance written notice.

You are not entitled to an extension of time on a margin call.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Past performance is no indication (or "guarantee") of future results.

Schwab does not recommend the use of technical analysis as a sole means of investment research.


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