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Stop Loss

Three Tips for Playing Bear Markets

A recent survey shows that 44% of Americans do not have a plan for getting through a potential bear market.

The survey was given to investors at the beginning of February as the Dow was selling off in a period of increased volatility. The question asked of investors was if they had a plan for getting through a 25% drop in the Dow.

With nearly half of people saying they don’t have a plan it’s clear that most investors never think about the possibility of a bear market.

The answers weren’t really that surprising to me…

It’s been such a long time since we have had bear market conditions that a lot of newer investors have no clue what it would look like.

That’s why I want to go over some tips for trading through a bear market so you don’t have to be like nearly half of the investing public without a plan.

Bear Market Tip #1:
Learn to Trade to the Short Side

This is a tricky concept for a lot of people.

There are investors who have years of experience buying stocks but have never even considered putting on a short position.

There are many ways to do this:

  • Learn to trade put options
  • Learn to “sell short” equities
  • Learn to trade inverse ETF’s

All of these are valids ways to speculate on downside in a stock, index or sector but sell stocks short and using inverse ETF’s can be risky.

Using puts in a bear maret allows you to harness the leverage of options meaning you can risk less overall in your positions.

This is a huge benefit in a bear market, which brings us to our next tip.

Bear Market Tip #2:
Risk Less on Average

In any trade setup, long or short, you should be risking less per trade than you would in a bull market.

Bull markets tend to move in a more slow and predictable manner but in times of increased volatility swings can be large.

This makes the day over day risk in any position much greater in a bear market. If you are normally risking, for example, 3% of your book you should be moving your average risk to 1%-1.5%.

You do this because day over day volatility is far more unpredictable than in a bear market so you need to protect your capital.

There’s nothing wrong with trading smaller in a bear market to protect your portfolio.

Bear Market Tip #3:
Trade Fewer Positions

Try not to hold too many positions at once in a bear market.

Focus on the best possible setups. You don’t want to hold too many positions in a broad based sell off as that creates a tough situation to manage.

Tighten up your trading plan to make it more selective and trade only setups that meet those criteria.

Doing this will make it easier to manage your portfolio during volatile price action and will lower your overall loss in the event of a large move across all of your positions.

Bear Markets Aren’t the End of the World

A lot of investors think it’s impossible to profit consistently in a bear market.

I am living proof that you can. I had the best years of my trading career during a bear market.

The list above does not include everything you need to know to navigate one, but it is a great place to start in forming your bear market plan.

Do this now, you never know when the dynamic of the market will change and you need to be prepared. An AlphaShark should be able to swim through even the roughest waters!


Andrew Keene

Andrew Keene
AKA, “The Alpha Shark”

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Andrew Keene

Andrew Keene is the editor of The Alpha Shark research desk at Agora Financial. That includes the daily Alpha Shark Scanner PRO, the monthly Alpha Shark Letter and the bi-weekly CryptoShark Trader.

He’s also the founder of a seperate business called AlphaShark Trading which founded in 2011.

Andrew’s worked as a proprietary trader at the...

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