You’re enjoying your position in a bullish market, but before you know the market goes into a downtrend and you start to incur losses. Stock markets are very volatile, any stock recommendation someone gives you can only be valid for a certain period of time. However, if you keep certain guidelines in your mind and stick by them religiously, they’ll help you take your portfolio to the next level. What should your plan of action be in such situations when the market is so volatile?

An amateur investor makes a lot of these mistakes, our service MarketSmith India helps you keep your investments intact without falling into traps during a downtrend –

Buying before a base completes:

A base visually represents a great stock’s need to take a break. After a nice run-up in price, preferably 30% or more, such a stock will decline – in most cases, mildly. The key to making money in the market, though, is waiting until a base completes before buying. In most cases, stocks that come down to their 200-day lines do so amid signs of institutional selling. Wait for the stock to prove itself more, and look for signs of institutional buying as the stock builds the right side of the base. Then you have a legitimate base.

Keep holding a stock:

Follow a rule: If a stock drops by 8% of its purchase price, sell it, no questions asked. This type of selling requires immense discipline and it comes over time. Successful investors never let their stocks to stay in their portfolio if they drop by 8% value as it can harm their portfolio drastically.

Buying every possible breakout:

Bullish stock charts tempt investors all the time during down markets. Some growth names will hang in there with compelling charts. A breakout may work for a while, but it will likely be short-lived. While stocks that hold up the best during down markets can go on to be the next leaders, they still should not be bought during a downtrend.

Buying low P/E ratio stocks:

If a stock has a low P/E, it indicates that the company is not performing well. It is rarely a case that a stock with low P/E will reap great benefits over time. Trying to catch a stock "on-sale" is fraught with risk. In many cases, stocks with low P/E ratios are suffering from weak fundamentals, where shrinking market share results in lower earnings growth. That's not something you want to see in a stock. An analogy could be that you cannot buy a Mercedes at the price of a Maruti.

Stop paying attention:

It is easy to lose interest when stocks are selling off, but market downtrends let high-quality names take a breather and eventually build new bases. When a new uptrend is confirmed, breakouts deliver the biggest gains. During a market pullback, try hard to make a list of stocks that held up the best.

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Author's Bio: 

For more than 50 years, our founder William J. O'Neil has been educating U.S. investors on the proven investing method he created. His investing classic "How to Make Money in Stocks" has sold more than 2 million copies worldwide. Now, for the first time, we're expanding to India to offer a tool focused on Indian stocks. Our goal, however, remains the same: To provide individual investors with the knowledge and information they need to achieve success in their investments and in their financial lives.