Bear Market – Understanding “The Bear”

Raymond Dalio is one of the most successful hedge fund managers. He manages the biggest hedge fund with more than $168 billion in assets under management (AUM). Ray is known for his deep analytic skills, knowledge on the financial market, and his economic model. He has published a long paper titled ‘how the economic machine works’. In this paper, he describes the cyclical nature of the financial market i.e., the market will always move in cycles. He mentions three key cycles: bullish, bearish, and sideways. In the bullish cycle, the market is generally on the rise while the bear market is the opposite. When a market is stagnant, it means that there are no major movements. Making money in the bullish market is pretty easy. Just buy assets and wait for them to appreciate. In this article, I will highlight five key strategies to help you make money in a bear market.

#1 – Pairs Trading

No one really knows when the market has entered a bear market. If they did, then investors would not have made the losses they made in 2007/08. The best way to remain protected when trading is to hedge every trade that you make. Pairs trading is the art of buying and selling at the same time. For instance, gold and the dollar have an inverse correlation. Therefore, opening a buy and sell position of gold and dollar will help you limit the losses you make. However, it is important to note that pairs trading will not always work.

#2 – Multi-Sector Diversification

Diversification is another important strategy to beat the bear market. Diversification is the process of buying ‘assets’ in various sectors. For instance, if you are an equities trader, you can buy financials, defense, and utilities. This will help you remain protected if one sector underperforms. Also, you can diversify by trading various items such as commodities, currencies, and commodities. However, you should do intensive research before you buy or short any item. Doing this will put your account at risk.

#3 – Quantitative Trading

In 2008, many investors lost money. In 2008, more than 700 hedge funds went down. In 2015, more than 900 hedge funds went down driven by increased market volatility and low oil prices. Ironically, these two years have been the best for James Simmons the founder of Renaissance Technologies. In 2008, he returned 82% while in 2015, he returned 17% net of fee when many funds posted negative returns. Ken Griffin, the founder of Citadel, one of the largest high-frequency trading companies was the best performing hedge fund manager according to Institutional Investor magazine. Most trades these days are implemented using quant strategies. Therefore, it is important to learn how to implement quant trading strategies.

#4 – Day Trade

In the financial market, you can do three things. One, you can day trade where your estimated duration of a trade is less than one day. Second, you can swing trade where you open trades to last for a few days. Finally, you can decide to become a long-term trader where you open trades to last a few weeks or months. To make money in a bear or a highly volatile market, I recommend that you use a day trading strategy. This is because it will shield you from huge market moves. For instance, if there is a huge data coming out such as the non-farm payrolls, day trading will help you avoid being caught up in a trade. Also, day trading will help you trade on the news.

#5 – Move with the Trend

As a day trader, the trend is your friend. The goal of any trader is to enter a buy position when a new up-trend is developing and exit once the trend is reached. Unfortunately, no person can accurately predict when the new trend is forming. However, using a number of tools such as the Average Directional Index (ADX) and the Moving Average one can tell whether the trend formed is strong or not. If you believe the trend has formed in either way, you should enter and take profits as soon as possible.

Bear Market – Useful Links

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