Bear Markets Present Traders With a Unique Set of Opportunities



by Kirk Cooper

Editor's Note: Kirk wrote this article to help answer questions about the workshop he is teaching next month. In that process and based on his professional trading career, he shared a few beliefs about how traders handle bear markets. These beliefs are probably useful to every trader to think about before the next bear market arrives (which may not be that far off). Even if you have no intention of attending the workshop, the piece may be valuable reading to stimulate some thinking and planning.

At a Van Tharp Institute workshop I attended last week, people were asking me, “Should I attend your bear workshop next month?” That’s a great question and not one that I have a quick or easy answer for. After managing funds and traders for the last two decades, I have lived through and traded a number of bear markets. At one end of the spectrum, I have seen many traders just move to the sidelines when a market starts diving — which can be a very prudent strategy. If you know you’ll sit on the sidelines during the next bear and simply will watch it unfold, you might not want to attend the upcoming workshop (although I’ll share a few reasons further down why you still might want to attend). On the other hand, if you understand the conditions of a bear market and are well prepared — you may want to be out on the field rather than sitting on the bench. Why? Bear markets present some of the best trading conditions you will ever find in the markets.

History has shown that bear markets consistently mean increased volatility. Most traders and investors view increased volatility as increased risk. There may be some truth to that belief — typically, liquidity disappears and gap risks increase — but increased risk for many can be increased opportunity for the few who know how to manage it. While most traders either stop trading in a bear or become busy “putting out fires”, the few that have made good plans in advance can benefit greatly from the big opportunities presented by the bear.

Bear markets, however, counter that big opportunity by presenting traders a unique set of challenges. The panic, uncertainty, and fluctuations in portfolios associated with bear market make the psychological challenges of trading them substantial. Equally important is the drastic change in trading style required for most people/systems when the bear market gets going. Just in anticipation (fear actually) of an oncoming bear, I have seen many people cut good bull runs short. Sometimes the start of a bear market is unquestionably obvious while other times it is deceptively subtle. On the other end of the market type, how do you know when it’s over, when you can go back to your bull market systems? We address all of these challenges and more in The Trading in Bear Markets and Down Markets Workshop. Attendees will not only learn how to profit in bear markets (and down trending markets) but will also learn how to exploit a bull move fully before it is over — which leads to a fair question right now...

Is the Current Bull Market Over?

One key way to monitor the market and keep an eye on the market type is to watch the big picture. Quantitative easing (QE) policies by central banks across the globe are making these times completely unprecedented in history. Many believe this liquidity is a significant reason why many of the equity markets of the world have had such a good bull move despite the generally lackluster economic environment. Some argue that the historic amount of liquidity makes this time different and also makes the risks even higher than in normal market cycles. Beyond the central bank policies, many countries (governments) are technically bankrupt and the global economy remains fragile with deflationary forces at the forefront of many policy setting minds. Will this time be different? Though I am aware of all of those factors, I don’t pretend to know what will happen in the markets or when. From my personal trading experience, I do know that preparing for a number of possible scenarios has benefited me greatly in the past. I also know that bear markets happen on a recurring basis — the question is not if it will occur but when. Capitalism and our economic system create cycles so it behooves traders and investors to be ready for changes in the cycle. Now more than ever, being prepared for what may happen next is critical.

As Winston Churchill said, “Those that fail to learn from history, are doomed to repeat it.” Given the unique nature of the global economy, I will paraphrase Churchill — those that fail to prepare for bear markets are doomed to miss their opportunities. If some of the “experts” are correct, this next bear could be quite an opportunity. So what do you need to do now? At a minimum, I believe every trader and investor should be prepared to preserve capital and have a plan for the end of the ‘storm’. If that’s you, that is fine and that puts you well ahead of the vast majority. Those willing to do a little more preparation now, however, can take advantage of the next bear market by trading it and then being in a much better position to take advantage of the bull market to follow. These are the areas we’ll cover at the upcoming Bear workshop.

Bear, V 3.0

The Bear Workshop next month is actually the 3rd generation of this Van Tharp Institute workshop. Why does that matter? The workshop is much more than one person’s approach to bear markets. Over the last six years, Van, Mark McDowell, and several other Van Tharp Institute contributors have provided a substantial amount of research and material for this workshop. In fact, my personal challenge instructing this workshop is having only 3 days to share an abundance of information, insights and strategies.

Workshop - Basic Outline

As Van explains frequently, trading success is the intersection of self, market, and system in the context of the big picture. The Bear Workshop will help you plan, prepare and profit from bear markets by introducing systems and strategies that can be used throughout the bear market cycle. The volatility and group psychology in bear markets have a big effect on the “self” portion of that formula. We will focus on understanding the kind of conditions you can expect in this market type.

In the workshop next month, we will cover:

  • The bear market type intersection of Self/Market/System,
  • The big picture as it applies to bear markets,
  • The psychology of bear markets and how these markets impact you,
  • How to identify bear markets and the internal phases of a bear market,
  • The unique characteristics of bear markets.

In addition, we will introduce the following successful strategies for bear markets -

  • An introduction to options,
  • Hedging,
  • Immunizing portfolios
  • Constructing defensive portfolios; and last but not least,

Strategies are ways to plan for and deal with conditions so you can meet your objectives. Strategies require adaptation on your part depending on your beliefs, circumstances, abilities, knowledge, etc. In addition to these strategies, we will cover several positive expectancy trading systems with specific rules designed to perform well in bear market conditions.

Profiting from trading a bear market can only come from creating a plan and being prepared — ahead of the start of the bear. Bear market events tend to happen so fast that there is little to no time to come up with a plan as the circumstances unfold rapidly. Trading bear markets profitably requires a level of discipline and fortitude that simply will not “just happen on the fly” for several powerful reasons - the speed of market changes, the magnitude of the moves, and market psychology. If you are caught unprepared to trade the bear when it gets going, your best bet is probably to move to cash and sit on the sidelines until it’s over.

Non Bear Market Benefits

The tools you’ll learn at this workshop have direct applicability to other market environments. If you are prepared to deal with bear market volatility, you are in an excellent position to deal with less volatile times. In fact, you could view this workshop as a way to improve your trading overall. How? Fear of bear markets prevents many traders from getting more out of bull markets. The media likes to refer this as “climbing the wall of worry”. When does a bull market end and when does a bear market start? Knowing several ways how to answer that simple question could dramatically improve your results for the period when that transition happens — whenever that will be. Even if you have every intention of sitting out the next bear market, this workshop will better prepare you for earning better returns from the long side — before the bear market starts and after it’s over.

I look forward to instructing this workshop and I hope you decide to join me and other Super Traders next month in North Carolina. Whether you take a sideline strategy or prefer to transform your previous “sidelines” time into a highly profitable period, attending this workshop will help you improve your trading results.

For more information on this workshop check out this short 3-minute video from instructor Kirk Cooper

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