How To Trade In A Market Bottom

Updated: Nov 19

Identifying high probability trades at the right time.

How To Trade In A Market Bottom

The market 'bottoming out' is a process that takes its own time. When you are trading stocks, you need to be aware of the bottoming-out process to better manage and understand your trading strategy.

I personally use numerous indicators within my strategy to stay on the right side of trend and momentum, using Moving Averages and the MACD indicator in particular.

When it comes to the bigger picture however, knowing where we are in a market cycle also helps us understand past and future performance, identifying a market bottom is part of that process.

See my recent video on improving the probability of identifying a market bottom using an RSI divergence technique.

Should you bottom-fish

One of the most tempting lures for new traders in a falling market is to buy stocks that have corrected significantly from the top. Some traders try to get some quick bucks from a bounce in such stocks while some try to hit a jackpot, thinking that the price will reach its older highs.

Unless you have a mechanism to identify and trade the bottoms, you must refrain from randomly taking bottom-fishing bets. When a high-flying stock from a bull market crashes, it takes time to reach its earlier glory. Also, if the fundamentals deteriorate post the fall, some of these stocks go down to become penny stocks.

When you are bottom fishing, your best bets may be defensive stocks. Stocks that are in sectors like healthcare where consumption generally comes back quickly as soon as the weight of the market is lifted. The returns on such bets are also not high, but traders take these bets for the safety they offer.

Trading reversals vs strength

Some traders swear by buying low and selling high, while some love momentum and prefer to buy high and sell higher.

As indicated earlier, a thoughtless 'buying the dip' isn’t the best strategy, and if you are trading reversals, you must have some rules and criteria that a stock must fulfil to qualify as a trade-on-reversal candidate.

I'm sure most of you have heard the phrase 'catching a falling knife', unless you have a thorough understanding or stra