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How to Survive a Bear Marketby Mark Crisp Most traders I talk to nowadays have lost so much money in the markets during the 2000 NASDAQ Bear Market they are read to throw the towel in. Having watched their portfolios being decimated by over 70% they simply have not got the money or the mental toughness to come back. What a shame. Profiting in bear market is quite simple... when you know how. On 18th March 2000 My NASDAQ indicator turned into negative territory for the first time. Since then up to today 4th December 2000 it has never gone back into positive numbers. The NASDAQ had now declined 50% from its February high and some of the previous highflying tech stocks have been killed. YAHOO. MSFT, AMZN are all way, way off their peaks. Any fool who had a buy and hold strategy with these stocks has just kissed about 70% of their capital good-bye. Yet not only should you never lose more than 10% of your capital during a bear market you do have alternatives to make a profit. Option 1 - Safe When my indicators turned negative way back in March I was already stopped out of many of my high-flying stocks, such as Yahoo, Q-Comm. By strategically trailing my stop behind the price advance I automatically exit when things turn around. But I was still in a couple of long positions when my indicator turned negative. So what did I do? Exit straight away? NO. I simply tightened my stop on these shares. I looked for the slightest excuse to get out. The shares duly obliged for within 1 week of my indicator turning negative I was stopped out. No regrets. I was pleased. Why shouldn’t I be with a 144% gain for the year? Once I was completely in cash and my indicator on the NASDAQ was negative what should I do? Well let’s ask it another way what could I do? I was in 100% cash. I had just made a 144% annual gain. The market was turning down. Why not walk away from the markets? Take a break. I don’t have to trade all the time. Simply walk away, check the indicator figure every week and wait for a positive market again before starting all over again. What’s wrong with making 144% during every bull market and sitting out of the market during the bear markets? This is what I would advice every novice trader to do. You must have heard the saying "Any fool can make money in a bull market.." So my answer is "trade only in a bull market" It’s really so simple. Option 2 - Conservative Most people are surprised to hear about shares still doing well during bear markets. Yes there are still some great moves. Very few and far between. The moves aren’t as powerful but they are there. Why not cut your position size down in half and go searching for these "exceptional" shares? Use MSTS to ferret out these shares and trade them. Think about it this way. If you can make 144% during a bull market and 25% during a bear market how rich will you be in 5 years time? You cannot treat every market cycle the same. Sometimes you can’t help but make money. Sometimes you will find it difficult to make money. But as long as you preserve your capital you will always be miles ahead of the average trader. Option 3 - Aggressive Bear: If you can make a lot of money on the long side (in the right shares with the right system) during a bull market then why not simply reverse the process? Go short! This is where the easy money is during a bear market. Which shares should you be looking to go short? Most people like to pick bottoms. These people lose money. Reverse this process. When selling shares most people like to pick tops. Impossible! These people lose money. When trying to sell a share at the top the bullish sentiment causes sharp rallies in the share resulting in stops being hit. Without a doubt and looking at thousands of shorting candidates I always find the very best time to short a stock is four to six months AFTER it has made a top. Back in September I recommended selling Yahoo at $82. It is now down in the $50’s. Look at AMZN, E-Bay, LU, AOL you’ll see how it is best to short shares AFTER the topping process has taken place. If you can make 144% during a bull market. 100%+ during a bear market how rich will you be? The next time you get caught in a bear market don’t hold on to your shares HOPING for a rebound. Way up your options 1,2, or 3 and act accordingly. A bear market can be just as pleasant as a bull market. |