It’s tough to make money during bear markets, everybody knows that. But it shouldn’t be anymore difficult to make money in a down trending market as it is in an up-trending market. A trend is a trend and as long as your a trader with the ability to short, it really shouldn’t matter which way the market is moving, correct? If the markets were up 400 points today, everybody would be happy and the media would be telling you this market is ready to rebound. I think there’s a number or reasons why it can be challenging to profit from declining markets and here are a few. Feel free to add your 10 cents as to why you’ve personally had difficulty this year trading this bear and maybe we can learn something that will help us all be more profitable traders.
- The media. They simply don’t like it when stocks go down. They blame the short sellers as if they have something to do with the fact the entire market is collapsing. Even the government got involved in this blame game when they banned shorting in certain issues this fall, pressing the idea that profiting from declining stock prices is wrong. This is all complete garbage as shorting provides a function in the capital markets. Most of the general public and some investors don’t even realize that you can make money when the markets go down. If you don’t know how to short then I recommend learning real fast because selling the rallies have been the only way to make money this year.
- The notion that markets have to go up. Let me explain what I mean exactly. Most people tend to believe that equity markets have to rise because that’s what they’ve been told, and so far history has been good to the majority of them. It almost seems unnatural when the markets move lower, and a good bit of the move down everybody is sitting around waiting for the markets to resume it’s uptrend. Take the chart above as an example of what I mean. As a trader I should have made a killing this year, yet I didn’t and I think I know why. The trend is obviously down, there’s absolutely no question about it yet I didn’t follow through with holding on to the short positions that I had many months ago. Was it because I really felt like the markets would bounce and take my profits? Maybe I got to short sighted with these massive snap back rallies and didn’t focus on the big picture which is down. I hear time and time again, traders saying how difficult this market is, including myself, but maybe we’re just making it more difficult on ourselves. I don’t have all the answers, as I’m just thinking out loud here.
- Fear looks and tastes different than greed. I’ve have tried to use the same strategy that makes money in bull markets and tried to reverse it when the markets are dropping and the results aren’t the same. Same indicators, same chart patterns, same discipline = different results. The only thing I can come up with is when markets are moving higher “greed” is the one driving the car. People act differently when they have a profit and they’re pressing their luck for me and the charts reflect mass psychology, therefore the charts will act different than when somebody else is at the helm. Stocks fall twice as fast as they rise so it’s important to be quick on the draw when you turn bearish, but the emotion that causes investors to act differently when they’re losing money is “fear”. Therefore you have to devise a game plan that accounts for the change in mental behaviour if you want to profit from it.
- Government Intervention. Part of my fear of holding shorts was it seemed like every day last month the government was sticking their nose where it doesn’t belong, giving the markets false reason to rally. They need to let the free markets be free and let the chips fall where they may. It may be more painful in the short term but I think that this bear market would have stood a chance of ending sooner than it appears it’s going to. The majority of this volatility is caused from the markets inability to price in all this unprecedented money printing and intervention by our government.