The Stock Surfer

Bear Market Trading Rules

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Chatting with a friend yesterday, we agreed that this bear market is a good learning opportunity but not necessarily a good time to make money. The volatility is extremely difficult to manage. I'm slowly learning that a bear market requires its own set of trading rules. Here are a few that I'm beginning to incorporate.

1. Buy the big drops, and sell the big rallies. In a bull market, you can buy strength. In a bear market, if you buy on a big up day you will likely get whiplash and be stopped out very quickly.

2. Trading gains must be taken. If you buy a stock for a trade, keep that in mind and take the gain. It can disappear quickly. This goes for both long and short positions. The SKF gained 20% from July 8-15, then went down 36% from July 15-22. Volatility brings opportunities, but it can also bring pain if you're not anticipating the next move.

3. Stay heavy in cash. This will smooth out performance and give you dry powder for the moments when risk / reward is in your favor.

4. Hold only your best investment positions. A bear market is no time to fall in love with stocks. I watched Gamestop (GME) plummet as it was thrown out with the retail bathwater, but I failed to see reality and sold too late. I'm fine holding Activision (ATVI) because it has not broken its uptrend.

5. Trade less if it's not going well. If you're behind the curve in a bear market, you will suffer from a thousand small losses. You buy on the up days and sell on the down days, which is exactly backward. It's better to do the opposite.