Profiting from Stock Market Corrections
If you are a stock market trader, making a profit is the name of the game. However, things can go very wrong in the stock market. One of the things that you never want to happen is a stock market correction. Stock market corrections are generally bad.
If you don’t know what the stock market correction is, this is when a stock market index, such as the S&P 500 for example, goes below 10% or more from its previous height. These stock market corrections can last anywhere from 1 to 4 months, and sometimes even longer. Stock market corrections can’t even turn into bear markets.
The fact of the matter is that stock market corrections are of course not good. That being said, it is possible to profit from stock market corrections. This is what we are here to do today, to talk about how to profit from stock market corrections. There are a variety of techniques that you can use to profit from stock market corrections, and we will discuss all of them right now.
Using Portfolio Defense Mechanisms
In order to profit from market corrections, managing risk properly is strongly recommended. It is generally recommended that you never invest more than 10% up a portfolio into a stock. Therefore, if you have a $5000 portfolio, you don’t want to invest more than $500 into a single stock. For the most part, you also want to set your stop loss level at about 10% under your entry price.
This way, you will have a 10% allocation ratio as well as a negative 10% stop loss. Combined, this means that if you lose a single trade, you will really only lose 1% of your total portfolio. That said, if there are stock market corrections, this can still be dangerous.
To profit from stock market corrections, you really don’t want to invest more than 5% of your portfolio into a single trade. You also want to keep that stop loss at negative 10%. This will decrease your risk from 1% to just 0.5% per trade. This will also allow you to have more trades open at once and with your total trading portfolio. Another good strategy here is to diversify your portfolio.
Paying Attention to Market Leaders
Diversifying your portfolio is important. However, you need to know where to diversify. Therefore, you need to pay attention to the biggest market leaders. The fact of the matter is that there are many opinions out there, and many of them are wrong. The bottom line is that you are the one making the final call here as to which stocks to invest in.
During stock market corrections, what you need to do is to use a simple stock market Screener. Most people will say that if the price is too high and risky, then it is probably going to go higher. However, if most people think that a price is too low and cheap, it will then usually go even lower.
You can use a stock market scanner to take a look at the 52 week highs, as well as the rate of change. If you use both of these features on the stock screener you can then identify which stocks are the best to invest in during market corrections. Just make sure that the stocks you want to invest in meet your trading plan and don’t stray from your overall trading strategy.
Decreasing Risk and Increasing Rewards
Yes, that risk to reward were a show is another thing to keep in mind. You obviously want to have the least risk with the highest chance of reward. There are three things that you can do here. You can allocate to small, as mentioned above. You can also scale in and move your stop loss to your break even point. You can then also use a trailing stop loss.
Once again, during stock market corrections, you want to invest 5% into a single trade. If there is a stock market correction, you may want to allocate another 5%.
However, if you do this, you then need to move your stop loss point to the break even point. You then want to use a trailing stop loss. Using a trailing stop loss means that you can keep increasing your profits while decreasing your risk ratio.
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The End of Stock Market Corrections & Increasing Gains
Something else to keep in mind here is that stock market corrections will usually end after about four months. Sure, stock market corrections may last longer and they can get worse. Simply put, there is no fixed rule as to when they will end or how far they will go.
What you are looking for here, in terms of the end of stock market corrections, is if the index breaks and then closes above its all time high. Stock market corrections are usually over when this occurs. If this happens, you can then start investing more money into single trades.
Use a Good Trading Tool
The other thing worth mentioning here is that when there are market corrections, certain signals services can still come in handy. There are some really good trading tools out there that can provide you with reliable trading signals no matter what the market condition is like. One of these tools is the UPSI or Ultimate Profit Scalping Indicator.
This is a special profit scalping indicator that is designed specifically for stock market trading, although it can also be used for other markets. This is a very user friendly and simple tool that will provide you with profitable buy and sell signals. Just choose the time frame, the stock, and wait for the signals to appear.
Making Money from Stock Market Corrections
If you follow the tips that we have listed above, making money from stock corrections should be easy. That being said, knowing what you are doing is beneficial.
Therefore, we do also recommend getting an in depth education on the matter. In other words, go find a good trading school to join that will teach you all of the relevant skills you need to be approved that we stock market trader.
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