Unfortunately, when the stock market goes down so do the value of your stocks — there’s no way to avoid this. It’s easy for first-time traders to automatically go into panic mode and make rash decisions to “save” their portfolio when something like this occurs.
What ends up happening in this scenario is that traders will either try to take all their money out of the stock market, or rush into a trade too late for any type of profit. What they should do instead is pause and ask themselves what to do when stocks go down.
Investors always remember their first time… experiencing a down market and how unsettling it is to see their stocks drop.
You wake-up one morning and find out that all your stocks are down, your positions are in the red, volatility is high and the S&P 500 is hitting all-time lows. And on top of that, the Nasdaq is tumbling and growth stocks are getting their butts kicked (all of which we’ve witnessed in 2020).
What do you do?
How do you manage your current and future positions while figuring out your next entries? Do you have a game plan?
The first thing we like to do when our stocks go down is look at the overall picture. We like to figure out whether the stock market is being affected because of short-term headline news, like oil. If that’s not the case, we then look to see if the news is a total game changer for the markets, like warning signs of an economic number that could prolong recovery or changes coming from the Federal Reserve.
When something big like this happens, the second thing we like to do is scale down our positions (so instead of buying 10 options contracts, we’ll settle on two) and ask ourselves: If stocks continue falling, do we still want to hold them?
And if we don’t, we’ll just cut them out. We can always get back in the position — stocks aren’t going anywhere.
The third step we like to practice when we’re experiencing red days is to avoid panicking, trade small and be prepared.
And believe it or not, we’ve come to find out that new traders struggle with this step the most…
Watch the video below to get more information on what to do when your stocks go down. And as always, make sure to leave a comment below to let us know what you think. What’s your favorite strategy to use when stocks are down? Let us know!