Great Traders Are Born in Bear Markets: Here Are 5 Keys to Follow

There is an old market saying that everyone is a genius in a bull market. When the market is in a strong uptrend, then throwing money at random stocks can be a very effective strategy. It doesn’t take much skill or wisdom when everything is running higher. When you are making money, there is an inclination to believe that it is due to your genius rather than good luck.

It is when the market gets difficult that real skill is necessary. It is when the market is at its worse that good traders will produce substantial outperformance. Sometimes not losing money produces the best relative performance. The best hedge funds tend to lag in strong market uptrends, but then they produce outsized relative gains when the going gets tough.

The impact of effective trading tactics and strategies becomes very evident in a poor market. Mistakes are magnified in bear markets, but it is the time when traders start to hunt for and position for the positive cycle that is about to develop.

Here are the keys to being a great trader in a bear market

1. Patience. The biggest mistake the traders make in a poor market is that they are impatient. They identify a stock that they want to own and then average down into the position too bad and too fast. When the trade doesn’t work, they sell at the exact wrong time and take a big loss. This happens over and over and is probably the source of the biggest losses for most traders. The best way to develop patience is to move incrementally. Make partial buys and sells and constantly adjust positions size so that you don’t feel trapped.

2. A Supply of Buying Power. Your view of market conditions is largely a function of your buying power. If you are fully invested in a downtrend, it is misery, but if you have substantial buying power, then you tend to see opportunities and not losses. It is particularly important to understand that you can create buying power anytime you want by simply selling positions. Too often, traders are hung up on recognizing a loss. They don’t want to admit a mistake, so they hold on to something, and that greatly impairs flexibility. Being able to sell a poor stock in a poor market is one of the hardest things for many traders to do, but once you do it, you tend to feel significant relief and are suddenly free to pursue better opportunities.

3. Familiarity. A poor market is a good time to become familiar with good stocks that will pay off when conditions change. If you are patient, you will gain familiarity. The longer you watch a stock and follow the news, the more you understand what will eventually cause it to make a big move. If you know the nature of a stock, then you will be better prepared to act when the time is right.

4. Persistence. The most important aspect of dealing with a bad market is persistence. You must keep slogging away day after day. If you enter a trade and it doesn’t work as planned, then take the loss and try again. There is no way to know when your timing will be right. You just have to keep trying and keep losses small while you wait it out. A big part of persistence is cultivating a positive mindset. I know – without a doubt – that I will find great trades in this lousy market if I just keep slogging away. If you believe that, then it will provide all the motivation you need.

5. A Thesis and a Plan. Make sure you have a clear thesis and plan for every trade you are making and admit when you are wrong or when conditions change. Why do you think that this stock is going to be a big winner? What is unique about the situation that will eventually lead to a strong move? What is your plan for trading it as it develops? When is the right time to start ramping up the size of your position, and when should you cut it? Think about all these things while you cultivate patience.

The current market environment is the worst that many newer traders have ever experienced but navigating these conditions is what will make you a great trader. The market is constantly going through cycles, and it is imperative that you learn to take advantage of the bear markets if you want to produce exceptional gains over the long run.