Bear markets are not frequent occurrences, so we get lulled into a ‘trance-like’ state of trading. We buy the dips and add to our holdings on the way up. Wash, rinse and repeat. In bull market conditions we never have to worry about elevated volatility for very long, because we just ‘know’ it won’t last. When liquidity is plentiful it makes the ‘game’ so much more fun for everyone. No worries.
Yet, during a bear market such as the one we are in now, it is vital to change tactics in order to survive. When the liquidity dries up, when big institutions start to leave the party it becomes difficult to trade, price discovery is elusive and wide ranges are common. We all abhor volatile markets and desire much more calm waters. But that is not what you get in a bear market.
We have to change the way we trade and invest during a bear market, or we will suffer consequences. Trading in a bull or a bear is very different. A bear market requires your attention much more than a bull market. That why it is said a bear market will ‘wear you out, not scare you out’. The big drops are scary, but our minds get twisted as we wait for the bear market to end.
What are some tactics we need to adopt to survive a bear market? Trade small, and trade less. Market moves are usually very wide, no need to be a hero and put too much capital at risk. Take positions down early and often. Don’t subject yourself to the whims of huge gaps and large moves, which will mess with your head, push you out of stocks before you should.
Lastly, be aware of what is happening around you. The conditions are such that liquidity can be pushed around very easily from one day to the next. A trader can certainly be chopped to pieces if they are not careful.