Day Trading in a Bear Market

The last official bear market was in 2009, so for many traders this is their first experience with trading in a bear market. After trading the market in 2020 and 2021, the market here in the following years is not as volatile as traders are used to, especially if they began trading in the 2020 hype. This is where the market separates the wheat from the chaff, and a lot of traders drop out relatively quickly as reality starts to set in and they are not able to adapt, and they panic while taking losses beyond the point of no return.

In order to adapt to a bear market, you will need to have the awareness to recognize that you may not make the same amount of money you made previously. This may be hard because you will have to accept the fact that you will make less, for now. (The ego will not like this) In a bear market, the mindset needs to be about survival rather than trying to hit big winners.

So how does this change your strategy…

In a lot of instances, traders start to realize that their strategy isn’t actually black and white, it's very much situational and reading the situation every day is key to avoid the big losses by taking big size or adding too high before a flush. In short, you need to learn to read the cues of the market on the day.

Some questions to ask are:

How many stocks are on the gap scanner?

Is the overall market gapping down or up?

Are the gappers holding their highs and moving higher premarket?

Or were they gapping up and fading back to the lows?

These are key questions to ask because they can give you an indication of the likelihood of market momentum for the day. With a Bear market, most days will have 0-1 gapper on the day that may not be holding up during the premarket. Then the market opens, and it doesn't run as much as it would have run in a bull market, or worse, it dumps. On these days, you need to be able to recognize and set realistic expectations on the potential gains for the day. 

If you come in wanting to hit a daily goal you would have reached in a hotter market, you will likely take a huge loss.

The aspect of your strategy that you can change to manage your risk are:

Sizing

Tighter stop

Breakout or bailout mindset

Tighter Max Loss

Taking Profits quicker

Trading Less

Walking away sooner

One thing you will notice in a cold bear market is that the stocks that do breakout, they only hold for a few seconds before flushing back down. This can be very frustrating for traders, that's why you need to reset your expectations and get used to taking profits quicker before everybody else. In these markets, it feels like everyone is fighting for a few pennies. Another good idea to stay consistent in this market is to walk away sooner in the day, hopefully at least small green.

Another variable to consider in your rules, is your max loss. Max loss should never be fixed. However, this doesn’t mean that you BREAK your rules. There is a fine line. Max loss should be set before you start trading, and it should never be altered after you cross it or get near it. If you recognize that the market is giving opportunity, you’re better off keeping your max loss at the regular spot. But, if the market is dry for the day, you should tighten your max by half or a third. This will keep you from overtrading and taking too many papercuts in a market that is not really worth trading at all. 

If you do happen to go through a streak of red days or you are struggling to stay green, this is the time to go back to the basics. Maybe that means going back through previous educational courses, or rewatching your live video archives, trading TD ondemand, etc. The best way to prevent further loss is to double down on your training and education even if you think you are experienced. You need something to fall back on and somewhere to turn to help you get through the rough patch. Emotionally, you may also need to take time off, pickup healthy habits, and focus on your emotional stability outside the market.

In Conclusion, the bear market requires traders to be more aware than before because the market volatility can be violent one day, then shift to a complete desert the next. So, in order to sail through the choppy waters, you must be able to adjust the sails frequently and swiftly. This means adjusting your max loss, sizing down on slow days, taking profits faster, walking away sooner, and trading less. The good news is that trading a bear market can teach you valuable lessons that you wouldn't get from trading a strong bull market. Therefore, if you can stay slightly green over time in a bear market, you will be well equipped to do well when the strong market inevitably returns.