What's the best way for participants to deal with the price declines, and what are some of the most effective ways to speculate on downward equity prices? Here are the pertinent facts.
What's Happening?
Traders and investors who have skin in the game are still trying to size up the recent declines in equity values all across the board and in every region of the world. What's happening? If you've been active in forex or CFD (contract for difference) transactions via the MT4 electronic trading platform, you already know that a long-term decline is in the works based on the volatility of interest rates and currency values. As for equities, are the losses as big and historic as all the news media say? It is true that it's been more than five decades since weekly closing values on the major exchanges trended downward for eight consecutive weeks.
But does that statistic spell disaster, a potential recession, or just a long-term bottom of the trendline? Excellent measures are the UK's FTSE and the US S&P 500, which have essentially mirrored each other for the past couple of months. The week of May 16 was especially tough for US, UK, German, and French exchanges as all lost significant portions of their total value. Whether the global economy has reached a formal entry into bear territory is unclear, but no one would argue that a downtrend is far off. The big question is how long it will take to reach a bottom.
How to Wrestle with a Bear Market
What can traditional traders do when prices seem to keep going down, down, down? Is short-selling the answer? For some account holders, shorting is a complex and challenging option because of the need for margin and broker approval. There is another, much simpler way to take advantage of a bear market for those who know how to trade CFDs (contracts for difference). One of the most efficient ways to aim for gains in a downward equities’ environment is to use contracts for difference and speculate on losses. The beauty of CFDs is that traders need not gain approval from a broker, don't have to use margin, and can go long or short on any equity they wish with equal ease.
For trading enthusiasts who want to use CFDs to short one or more securities, it's important to get connected to a broker who offers the service. Not all do, so make sure you ask about CFDs before opening an account with a new online brokerage. Note that there's no need to own the underlying asset when you use a contract for difference. You own a contract when you buy a CFD, not shares of stock, commodities, cryptocurrencies, or precious metals. Those who prefer this way of doing things prefer to avoid direct ownership of assets and instead want to simply and efficiently speculate on which direction the price will move.
Don't Fall for Panic Induced Myths
Whenever there's a large price correction after months or years of an up-trending marketplace, you'll hear all kinds of misstatements and fear-induced myths, most of which are the result of emotional panic. As everyone knows, even if all you’re doing is trying to teach yourself to save money, it's never a good idea to let emotions play a role in financial decisions. That's particularly true during times of a price decline that could have a bit of steam left in its engine. What's the best way to avoid falling prey to myths and fright-filled predictions? The answer is to gather facts and examine the situation objectively. Beware of the following ill-informed warnings below, which don't amount to anything but which are repeated by media outlets every time stock indices take a dive:
- This is the worst it's ever been. The truth is based on percentage losses of total value, there have been many worse times in recent economic history.
- The only safe asset right now is gold. There are no totally safe assets, and for the record, gold has not been doing so well lately, even as stocks have been going down.
- The safest thing to do is stop trading and go to cash. In reality, there are several excellent opportunities out there for people who are willing to look and who have patience. When indices are trending down, many people choose to short various assets. Others wait for prices to reach an obvious bottom and then get back in on the long side.