I hear this all the time from investors and traders: “I can make money in a bull market, that’s easy. What I really want to learn is how to make money in a down market.” It’s much easier said than done of course, but you can make money. You just need the right play book and mentality.
Bearish downtrend vs bear market
First, you need to understand the difference between a bear market and a bearish market trend. A bear market is long-term and not many investors or traders make money. Most lose money; some lose a fortune.
A bearish market trend is short term (usually) with many opportunities to make money, because sentiment is often tilted to the bullish side (too far). To make money, adopt a contrarian trading strategy. Use technical analysis to understand how and when to take the downside of that trade, and it’ll pay off handsomely.
Bear markets are brutal
Markets fall hard during a bearish downtrend, but not necessarily in a bear market. I like to define a bull market as one that goes up and a bear market as one that does NOT go up. Notice, I didn’t say “down.” Market can go sideways, which is equally frustrating for bulls and bears.
Back in the 1970’s, the economy was plagued by high inflation, high unemployment, high energy prices and slow growth. The bear market was long and drawn out, and the market went sideways at times. Bears lost money with bets to the downside, and bulls lost money after a “rally of hope” would fizzle out.
Luckily, bear markets don’t last very long. The last lengthy one was in 2001-2003. It was a painful period, but it did clear out any remaining bullish sentiment from the go-go 1990’s.
How to make money in a down market
So here’s my advice about making money in a down market: take advantage of a bearish downtrend, because it can be very lucrative.
Go on the defense during a bear market. Rather than trying to make money, the best thing you can do is shed trades to preserve capital, hold cash (aka, dry powder) and look outside equity markets for new opportunities. Watch the technicals for a change in trend and wait for the next bull market. You’ll have far more opportunities to make money on the upside (and downside) than in a bear market.
