We have not seen a bear market in around a decade. We have seen periods when the SPY has had large pullbacks for a week or two, but the dip has always been bought up. Then we continue to make all time highs. In February this year we saw a massive retracement. The dip was bought up, but we couldn’t get back to all time highs. We started to fade off again, indicating that we might be heading to bear market for the first time in many years.
We are seeing lower highs, failed breakouts, and many breakdowns that follow through in the overall market since the correction in February. A bear market requires a very different set of trading strategies. Here are 3 strategies you need to be using in a bear market to survive and profit as a trader:
Not many new traders know that you can make money when stocks go down. This is called short selling (also referred to as shorting) , when you borrow shares of a stock from your broker and then buy them back later, ideally at a lower price. Short selling can be very profitable in market environments like the ones we are currently in.
However, you have to manage your risk even more aggressively when short selling. A long position you can only lose what is in your account balance. But with short selling you can lose more than what’s in your account because stocks can go up more than 100%, meaning you would go in debt to your broker.
Here is an example of a short trade we took on IRBT in February when the overall market was plummeting:
Bear markets will typically bring a lot of volatility into the markets. This means that stocks will be trading well outside of their normal ranges, which is great for day traders. If you are not familiar or confident short selling stocks, there is still plenty of money to be made to the long side in a bear market. Stocks that have big pullbacks will almost always have a large bounce at some point.
Stocks don’t just go straight down forever in a bear market. Just like stocks pullback when they are in an uptrend, stocks will spike when they are in a down trend. When stocks get over extended to the downside, they will often have nice bounces. This strategy works especially well when a stock has had several consecutive down days. Keep in mind that this type of trading setup is not something to marry. You are just going for the quick counter trend move, and then quickly taking your profits. Once the stock bounces, it could start to fade off again and you may end up breakeven or with a losing trade.
Here is a video explaining how to trade bounce plays successfully.
Stay In Cash
Knowing when not to trade is essential for achieving success as a trader in the long run. In bear markets, stocks will not just go straight down every month. They will sometimes consolidate sideways, and not have an obvious trend. They will start to trade in a tight range, and there will not be much money to be made because there is no volatility or range to profit off of. During these times it is crucial that you stay on the sidelines until one of your go-to setups presents itself. Patience is crucial during these periods.
When you look back at your trades at the end of every week and add up your PNL for the week, you will see how much overtrading can hurt you. Even if they are small losses, boredom trades are a complete waste of your physical and mental capital. In order to be a successful trader, you need to have the discipline to only trade when your edge is there. In a bear market, you cannot be expecting the market to dump huge every day. You need to wait for an obvious trend and volatility to come back into the market before making trades.
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