How To Protect Your Portfolio During Market Dips

Volatility is the lifeblood of the forex market, and the way to make money with forex funding is to keep a clear head, form a strong, robust trading plan and focus on the long term, as money will flow in and out of forex on a daily basis.

However, sometimes you notice an unexpected trend different from the ebb and flow of the market that signposts that a market dip or even an outright bear market is on the horizon.

As currency pairs alongside conventional stocks are considered to be more volatile and thus riskier asset classes, forex will be amongst the first places that wider market sentiment will be 

felt, and the key to making and keeping as much money as possible is to know when and how to react.

Reacting too quickly can cost you money in unnecessary transfer fees as what looks to be a recession turns out to be more of a short-term correction, whilst reacting too slowly or riding out the wrong storm can cost you your entire account.

Here is what you need to know if you want to swim against the tide.

Do Not Panic About Your Portfolio

If the wider market is down, the first time most people will notice is when they start seeing downward trends in their own profile.

This can be concerning, especially if there are substantial drops, but the most essential step you need to take is not to panic. 

Trading out of fear is one of the two worst ways for you to trade, with the only one worse being trading out of greed. Both cause you to make irrational decisions that can turn a potential small loss into a guaranteed significant one.

Take a break or even stop trading for the day and when you have had a chance to calm down and relax, take a look at why your pairs have lost value. 

There are plenty of reasons why a stock goes down and not all of them could have reasonably been predicted. There is risk involved with forex trading, otherwise, there would be no volatility and likely no money.

Make sure you can discern the difference between market turbulence and an actual downswing before you react.

Diversify And Hedge Your Trades

Fortune favours those who do not risk everything on a few blockbuster trades. If you are struggling to make money with your favoured currency pairs, consider diversification and looking for pairs in a much more favourable condition.

Outside of global market meltdowns, if one currency pair is doing badly, chances are strong that another is doing well by comparison as investors work to get their money out of a currency suffering a downturn.

This has happened a few times with the Great British Pound. When the September 2022 fiscal event happened and took the market by surprise, whilst the pound plummeted, nearly every currency pair that shorted the pound became wildly profitable.

However, when looking into new currency pairs, make sure you know how they work and try to hedge your trades when you can. Trade contrasting pairs so you either make a small profit regardless or reduce your losses significantly as one investment offsets the other.

Try to avoid exotic currency pairs as well during this time. In a bear market, it is best to stick to the fundamentals if you are at all unsure about what you are doing.

Look At Your Forex Calendar

Forex trader using crypto exchange mobile phone app for investment and stock market analysis
Forex trader using crypto exchange mobile phone app for investment and stock market analysis

Regardless of which currencies you are trading, there will be upcoming events that could create significant ripples in the trading environment.

If you feel like certain currency pairs have the potential to do better, it may be best to invest beforehand and hold on to them at least until the dust settles on the latest report, budget or statement from the national bank managing the currency.

Look For Undervalued Pairs

Not all currency pairs will go down equally, and not every falling currency has the same circumstances. Some will get much worse but others will fall and then start to pick up steam again.

Find examples of the latter and buy them whilst they are still not at their fully realised value. Once they recover and the market corrects itself, you can make a comfortable profit.

Buy The Dip

Whilst “buy the dip” has become a punchline in other forms of stock trading thanks to the chaos of cryptocurrency investment, buying the dip is a risky but potentially very effective way to make money in a bear market, as long as you actually buy at the dip and the price doesn’t fall further.

Finding the floor is the most difficult part of the equation, but seeing the first bullish candles is like seeing the first shorts of spring and can be a very vindicating feeling.

Set your targets carefully and make sure you set a stop loss order; many other investors will be planning the same types of movement, and enough investors making moves will create quite a chaotic investment environment.

You can do the opposite as well, known as selling the rips, where you short big gains that are overvalued and set to fall in value, but that is less of a bear market strategy for forex except in very rare cases.

Be Both Bullish And Bearish

Bull and bear on a balance scales. Bearish or bullish market trends on stock exchange.
Bull and bear on a balance scales. Bearish or bullish market trends on stock exchange.

Because currency is traded in pairs, it is not only possible but very common to be both bullish and bearish in the same trade, as going long on a currency pair invariably means shorting the other.

Stick To Your Disciplined Fundamentals

Whether the overall line is going up or down, most of the fundamentals of trading should not 

change too much and in fact, in a down market, a disciplined hand can help to stem the bleeding quickly.

Stick to your analysis, use stop-losses, stick to your risk tolerances and know when and how to use leverage correctly.

Most importantly, let profits run and cut losses quickly. The less you lose the more you stand to gain, and in a bear market, losses are far more likely to fall further than normal.

Be Prepared To Move Quickly

If this is your first bear market, it can be quite a shock to see just how fast the market moves given that it is typically characterised as a “slowdown” or a reduction and to succeed you need to be on your toes.

This is because the two best ways to make money when the market is bearish are through looking for undervalued currency pairs, or through short-selling, an exceptionally high-risk trading strategy that can be rewarding or utterly ruinous depending on the situation.

It is a market that can be very risky, and success is about being able to navigate and make a decision as quickly as possible.

Consider Short-Selling (But Be Very Careful)

When a market is on its way down, whether it is the forex market or conventional stocks, there is potential money to be made by betting against the market and making investment moves under the belief that the market will fall further. Typically this is done via short selling.

To explain short selling we need to explain long and short positions, which although they can get technically complex are relatively simple in concept. 

A long position is a standard forex trade; you have bought currency pairs and thus want to sell them for more than you paid for them.

A short-selling position, by contrast, is when you borrow shares and sell them for the current price without having paid the current price. These shares are then owed to the original broker, and the deal is completed when those shares are bought.

The key difference is that if you go long in one position you are expecting it to increase in value whilst if you are going short in a position you are expecting it to go down.

In forex currency pairs, typically you are long in one half of the pair and short in the other half.

Short-selling has the potential to help someone in a down market make considerable amounts of money when a lot of people are losing it, but it has the very critical risk that if it goes wrong, it can go catastrophically wrong.

After all, the furthest you can fall is the ground, but the highest you can soar is infinity.

When you go long, the most you can lose is 100 per cent of your investment, and with currencies, it is almost impossible that you will lose anywhere close to that.

If a short-selling position does not go as intended, you can lose many times your initial investment if it goes wrong, which is typically when a broker will make a margin call or close the account entirely.

The most likely reason for such a situation is a short-squeeze, where the value of a currency you have a short position increases rapidly, forcing a short-seller to quickly buy the shares back for a loss.

This highlights the unpredictability and risk involved, and you should develop a strong and sound trading plan with a way to manage the inevitable risk involved.

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