Bear markets do not occur frequently, which makes it easy to get lulled into a trance-like state of bull market trading, notes Bob Lang of ExplosiveOptions.net.
If you don’t change your trading strategy in a bear market, you will get clobbered.
We just came off a very long bull market run. You just had to buy the dips to increase your wealth as the markets moved higher. You never had to worry about elevated volatility for very long, because you knew it wouldn’t last. Liquidity was plentiful, which made the game of trading so much more fun for everyone.
Change Your Strategy in a Bear Market
Bear market trading is not fun—it’s stressful. The liquidity has dried up, big institutions have left (or are still leaving) the party, price discovery has turned elusive, and wide ranges are now typical. I don’t like trading volatile markets any more than you. I prefer calm waters, too, but that’s just not how a bear market works.
To trade a bear market, you need to be at full attention at all times. That's why it’s often said that a bear market will wear you out, not scare you out. Yes, big drops are scary, but it’s waiting for a bear market to end that will really play with your mindset.
To Survive a Bear Market, I Adopt These Tactics
Trade small, and trade less. The market moves up and down are usually very wide, so don’t put too much capital at risk in any one trade.
Take positions down early and often. Leaving your portfolio open to the whims of huge gaps and large moves will mess with your head and lead to trading mistakes. Take a win when you have one.
Be aware of what is happening around you. Bear market conditions allow liquidity to be pushed around very easily from one day to the next. You can be chopped into pieces if you are not careful.
Remember that bear markets are often short-lived. When you’re in one, it feels like a bear market will never end. But they don’t often last long, and they always end.
Learn more about Bob Lang at ExplosiveOptions.net.