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Day Trading a Bear Market

Unless you're new to trading or been living under a rock for the past 6 months you probably know there has been a relatively large sell off this year. As of June 13th, 2022 the S&P 500 (ES/MES) entered into a bear market.

With tons of new retail traders entering the market these past two years, it would be fair to say many traders today have no idea how to day trade a bear market, in todays blog we are going to hopefully change that a bit!

First off, what is a bear market? The official definition is " A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or m

ore from recent highs amid widespread pessimism and negative investor sentiment." In layman's terms, it's when price has fallen 20% from its recent highs.

In the past 6 months we have seen the ES/MES fall from 4800 all the way down to 4700. That is a decline of 1100 points or about 22%. Now each bear market is different and we aren't going to get into how much further price could drop down to or try to pin point when price is going to start moving back up. At the end of the day we are day traders and simply look to take advantage of intra-day movement.

Lets go through a few items that might be able to help you day trade a bear market.

#1: News

The news can be you best friend or your worst enemy. Normally when markets sell off we have our government officials ( President/FED/Treasury Secretary etc. etc.) come out and speak. This is due to the fact traders/investors are looking for more information on the solution. Now it is our opinion to put your trading on hold when there is major news. This is due to the fact we normally see increased volatility and price is no longer reacting to key levels but to what the speakers/news is saying.

Unless you are an economist and are very very familiar with all the types of news releases, then you might want to sit back and wait it out.

#2: Gaps

Many times we see gaps up and gaps down when the New York sessions comes online at 9:30 am ET. These gaps depending on there direction can turn into great opportunities. Now we aren't going to get into specific gap up and down strategies because we would be here all day. However we do reccomend that you go back and look to see how price reacted to gap ups and gap downs during the Covid-19 sell off in 2020.

Gaps can help set the tone for the day. Take the gap down on Monday June 13th 2022. The ES/MES gapped down a significant amount overnight, when the New York session came online we saw price reject higher prices and sell off for the rest of the day. Each gap down/up is different and we strongly urge you to study these gaps before trading them.

#3: The Past

Like we said above, each bear market is different. But it wouldn't hurt you to go back and see how price reacted in the past. The biggest difference we are seeing today compared to the past is the HUGE amount of retail volume. When we say retail volume we mean, average ordinary individuals who are not working for wall street/big brokers.

These traders have most likely never seen a bear market before unless they traded during 08. The best example of a bear market with similar retail volume would be the Covid-19 selloff during 2020. Now if you do go back and look at the 2020 sell off, we would reccomend you stick to the first part of the sell off. This is due to the fact we saw such a quick recovery that was influenced by many outside factors such as the FED.

#4: Risk

Many day traders will look at these huge sell off days as a way to make tons of money and they aren't wrong. But there is a catch, when you can make tons of money you can also lose tons of money. That is why whenever we enter into a bearish period, one of our rules is to drop risk and increase stoploss and take profit. Now you might ask your self " how am I dropping risk if I increase my stop loss?".

We are dropping our risk by cutting our contract size. For example, if we are trading 4 contracts with an average stoploss of 4 points. We could cut our size down to 1-2 contracts and increase our stoploss to 5-8 points and still be risking the same or less. This in-turns gives our trades a little bit more room to move. The extra room to move, may be needed due to the increase in volatility. Now we STRONGLY reccomend you back test this method before risking your hard earned money.

#5: Signals

Once you've gone back and looked at previous sell offs and bear markets, you will probably see many of the signals we talk about in the price action course. Study these signals but most importantly study the context and market structure of these signals. Once you've done that go and back test these signals to make sure they fit your style of trading.

Lastly, bear markets can be very very tough to trade. Price can make HUGE moves in either directions of go into tight volatile ranges. Make sure you have a solid game plan before day trading a bear market, good luck!

Comment down below on how you plan on trading this current bear market. If you are running into any issues with the current market, this could help.


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