Bearish Trades in Bull Markets

 

Date: 6/17/2021
Author: Chris Hood

 


Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.


I have a generally bullish bias on the market.

Over time stocks have a tendency to rise in value. Sure, sell-offs, bear markets, and black swan events, but even a casual historical glance at the market show that it tends to rise over time.

With few exceptions, stock prices rise slowly and drop quickly.

“Bulls take the stairs, and bears take the elevator.”

Simple, trite, but very true.

Sure, there are parabolic runs in stock prices. A small-cap pharma company could be approved for a new drug, or some heavily shorted ticker might see a short squeeze.

Yet, these are exceptions, not the rule.

Every trade should begin with an evaluation of the market condition.

This is a critical concept that most beginners, and even some more seasoned traders, ignore. Always know whether the market is trending up, down, or sideways.

Moving averages tell you all you need to know.

In up-trending markets, shorting tickers through bearish strategies such as bear put spreads, bear call spreads, long puts, and naked calls is generally ill-advised.

Though there are always stocks in downtrends, remember that:

“A rising tide raises all ships.”

In other words, uptrending markets tend to pull individual equities with them.

So be very careful if you decide to make contrarian plays. Over my 20+ years of trading, I’ve noticed something important.

Bear plays in bull markets have a much lower probability of success than in bear markets.

There’s a nasty tendency for the market to quickly reverse upwards and smash your positions.

I never use hard stop losses, but in this case, I’m out if my trade is down 20-25%.

It’s just one of my rules.

Take it or leave it.

None of this should dissuade you from the careful application of bearish positions. But ALWAYS remember that your success rate will be higher when you aren’t trying to swim upstream.

I actually love trading on the short side.

Money comes much quicker when you get it right.

Yet, it makes much more sense to go with the flow. Know what the market is doing, then bias your portfolio to work with it rather than against it.

Some traders try to maintain absolute directional neutrality, and others almost specialize in bearish strategies.

If this is your preference, and you’re consistently profitable, then keep it up.

There’s no one right way to trade.

I’ll never discount someone’s strategy if they’re consistently profitable.

When you’re a beginner, follow the trend. The analytic skill, trade management techniques, and capital required to be a bear in a bull’s world are beyond most new traders.

How do you develop these skills?

Paper trading.

But I’m sure you’re already doing that. Aren’t you?

For those of you out there ready to play the short side, you might just get your chance soon.

We’ve had several all-time highs in rapid succession. A fat, bloated market pumped full by Fed market policies eventually has to correct.

Keep your eyes on the charts.

Don’t say I didn’t warn you.

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