This market has been out of control, in a good way for day traders like myself. For long-term investors not so much… I want to explain the best way I have found of how to trade in a bear market.
As expected the SPY pulled back again and moved back to test the lows at $181.00. This was predictable because it’s just part of the way stocks move and if you want to learn about the framework of the market which defines its movement, you should check this out. The volatility has just been incredible in the last several weeks and I’ve been killing it nearly every day in both the small-cap penny stocks and high priced big boards! This kind of market doesn’t come around that often, but when it does, you have to capitalize.
This is the time when you can make easy money from all the long term investor suckers that have been earning money for months or years without having any clue about what they were doing. During market pullbacks or potential bear markets, all these people give back a lot of their unrealized profits because they really don’t have any plan. The funny thing is when the volatility spikes they hold until the pain starts to hurt and then they throw in the towel at the worst possible time just before the market rebounds.
So far the SPY has held it’s support level but it remains to be seen whether this is a bottom or whether the SPY will crack the low and take out all of the stop losses under $181. Either way for a day trader like myself I don’t really care what happens because I am going to trade the opportunities that arise after the support level breaks or holds. I don’t buy and hope because this is the way you get destroyed, especially when you are involved in trading higher volatility low priced stocks.
Profitable trading requires going against the herd and being confident in your strategy through the ups and downs. It also requires having the discipline to sit on your hands when there are no opportunities or too many less attractive opportunities. Most new traders have a problem with both of these tasks.
Naturally, if you are wondering how to trade in a bear market, shorting pops has been very profitable recently, and buying bounces has also been great because even when stocks are dropping, you still get shorts covering which cause momentary long setups. The key to trading in volatile markets is you don’t want to hold for too long. With longs, it’s difficult to short break downs because violent rallies often occur before the real break downs play out. For this reason, I like to wait for the impatient shorts to get squeezed and then get short the stock in anticipation of the crack. This typically will be when a lower high form.
Taking predictable profits quickly is ideal when trying to find out how to trade in a bear market. For new traders, this is not easy because they make say $500-$1000 and then watch the stock move much more in their favor after they exit. Then they whine about how they missed out on so much more in profits, but the reality is, you aren’t trying to maximize your profits.
You are just trying to minimize your losses and to do this, especially in a weak market, you have to take profits when they are there or they won’t last. You don’t necessarily want to scalp a stock for a second or a minute (although sometimes this can be a smart move), but you need to watch the signals and be mindful that opportunities come and go quickly in volatile markets.
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