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How you can outperform panicked markets

TradingPub Admin | June 24, 2013

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If you have seen times when many different assets experienced sharp declines and you want to know how to beat the markets under such conditions, obtaining some free trading education in this particular area could be helpful.

During certain markets, global investors push down several types of assets - stocks, bonds and commodities for example - at the same time. This situation is frequently created by these market participants reacting to some highly negative news such as financial or economic turmoil.

Since these securities are all depreciating at the same time, their prices follow each other closely. Since the different assets are all moving lower in value simultaneously, it becomes more difficult for people to engage in active trading and pick out the securities that will enjoy better performance than the rest of the market.

Managing your psychology
If you want to be able to outperform the market in these situations, you should start off by ensuring that you maintain the right frame of mind. If people are selling off assets due to negative economic news, don't get caught up in the dire sentiment. Think of the long-term price movements that the markets will experience. During the financial crisis, the stock market plunged in value. While this caused many to shun equities, anyone who bought these assets during the market low and then held them for several years could have enjoyed some excellent returns.

The moral of the story is that if you encounter a bear market, keep your wits. Don't let mass hysteria cloud your decision making. If you can buy when the markets are low and then later sell after they have enjoyed substantial appreciation, you can enjoy strong returns.

Profiting in bear markets
While some may panic in the event that all asset classes are experiencing sharp drops, it is important to remember that these securities do not have to be rising in value for you to generate returns. You can benefit from falling values in stocks, bonds, commodities and other assets by taking short positions on them. There are many options that can be used to achieve this objective.

One such asset is margin trading. If you want to set up a margin account and do some research, you can learn how to short sell different assets, for example stocks and securities that represent different indices. During a bear market that creates sharp declines in equities, an investor could create strong returns by shorting a traditional stock market index such as the S&P 500.

It is also possible for investors to take short positions on different assets through exchange-traded products. One easy way you can do this is by trading inverse exchange-traded funds. The basic idea behind these securities is that they provide returns that are the exact opposite of an index. This is another case where you can potentially generate promising results by taking a short position on an index.

Finally, one more way that you can benefit from bear markets with strong correlations is trading derivatives. These securities are designed to help the user either increase or decrease risk, and you can use them to set up positions that will provide you with returns in the event that certain assets fall in value.

In addition to using specific financial instruments to outperform bear markets with high correlations, there are also specific trading strategies that you can harness to achieve these same results. One good way to outperform in such situations is to utilize covered call strategies, which involves buying assets and then writing call options on them. Doing so generates income, which helps reduce exposure to downside risk.

If you want additional free trading education, you can find it at TradingPub, home to some of the top investors and traders in the industry.