When markets undergo deep corrective action there is always a rush to buy the 'bargains' that are created. While it can be a great opportunity if you pick the right names, there is a tendency to buy too much, too fast and that creates tremendous problems if the downtrend deepens.
In order to better navigate the action in a downtrend, it is important to understand the psychology that develops. There are two issues that drive the rush to buy pullbacks. The first is that institutional Wall Street, and many stock market pundits, have a bullish bias and want everyone else to have one also. They want you to buy stocks and to stay invested in the stock market because that is the business they are in. There are endless platitudes about the benefits of long time investing and it is in the interest of many people in the stock market industry to keep it that way.
More often than not, the experts were telling us that the stocks that are crashing now, were great buys at much higher prices, How can those stocks not be even better buys at this point? We better hurry up and buy them before the opportunity disappears.
If you buy 'quality' stocks they will likely to work out over time but if you buy them right your chances of even better returns is enhanced.
The second psychological issue that comes into play is the inclination of many market participants to try to nail exact turning points. They seek the glory of being the masterful trader that nails the bottom tick. The problem with this approach is that it only works proactively. You can't catch the bottom if stocks are already going up. You can only do it if you buy into the teeth of the decline. This creates a strong inclination to buy while stocks are still going down and have no obvious support to reduce risk.
This inclination often leads to building positions too big and too fast. The danger of this is that if stocks continue to sink you are much more likely to sell them poorly as you try to escape the stress and emotional pain. Big positions that are going against you have a tendency to make you do the wrong thing.
The better and safer approach is to keep buys during a downtrend quite small. Buy some of your favorites so that you have them on the radar and can track them easily but don't be in a rush to keep adding into weakness. Look to add on strength and when the price action improves. If there has been a meaningful correction it will take quite a while for stocks to work their way higher and there will be plenty of chances to add as good charts develop.
The focus should be on catching the meat of a move rather than trying to time turns with precision. Your goal should not be to be fully invested at the exact moment the market turns. Your goal should be to be fully invested when a meaningful uptrend is starting.
One of the great advantages of buying after a stock has bounced is that there is a very natural support level at the recent lows. If that low holds then you can feel a bit more confident that you have higher odds of a good trade or investment. If the lows don't hold it is a natural stop-out point or will help to create another potential buying opportunity when the next bounce occurs. When you buy into the teeth of a decline, it is harder to be disciplined and to control risk. If you do take that approach, it is paramount that there be some risk control regardless of how great of a bargain the stock may be.
Downtrends create fantastic opportunities but impatience can be extremely costly. More traders are wiped out by averaging into downtrending stocks too aggressively more than anything else. Stay patient, buy strength rather than weakness and manage your risk and you will do well.