Short with Confidence!
I just wanted to make a quick and easy blog post that showcases ways you can short a bearish market with confidence! I’d also like to update you on what the Art of Trading private community has been trading and exactly how we’ve been managing these positions.
Lately I’ve been creating blog posts that have highlighted bearish market conditions and what to look for! You can find these posts here:
Today I would like to highlight ways in which you can stay convicted in a bearish market and preserve your mental and emotional capital while still using your technical trading and risk management skills without getting chopped to pieces in the volatility. We will also look at what the Art of Trading has been doing this past week!
So as many of you have probably noticed this year, bearish markets can create very volatile conditions that can be very challenging to trade. If you’ve never experienced prior bear markets these trading conditions can be very draining on not only your trading account capital but also mental and emotional capital!
So, what can I do as a trader to gain the confidence I need to perform in a bearish market?
Trade only 1 – 2 positions at a time!
Don’t overwhelm yourself with too many positions. Look for 1 or 2 setups that have well defined risk and reward price points!
Stop over trading!
You’ll drive yourself insane trying to catch every move in a volatile market and you likely won’t. Over trading can chop your trading account up and drain your mental and emotional capital. Again, stick to 1 or 2 good setups a week and stay disciplined and concentrated on that. Small, consistent gains will add up overtime!
Give your trades room to breath!
Volatility naturally causes big moves in stock prices. If you’re constantly setting stop losses too tight, you’ll naturally get taken out prematurely. This action in itself can cause over trading as you’ll likely want to revenge trade back losses on positions you were prematurely stopped out on!
If you’re finding yourself getting too emotional or trigger happy on your trades or you just can’t handle the volatility, size your trades smaller! This way your daily PnL swings are a little smaller and your emotions stay intact!
Don’t short in the hole!
In a strong bullish market instinctively, most traders look to buy strong stocks on pullbacks. In strong bearish market think the opposite. When weak stocks show strength, short the strength. Your risk will consistently be less (short against recent highs!)
Instead of Red 2 Green (R2G) setups look for Green 2 Red (G2R) setups!
In bullish markets gap down opens are commonly bought up. In bearish markets Gap up opens are commonly sold down!
When looking at the “bigger picture” what signs could I look for the next potential move in the market?
Here was an update I gave Art of Trading members:
In short, I was explaining to Art of Trading members that the weakness in DJIA and SPY should eventually translate over to Nasdaq and IWM. I suspect the next potential move for the market will be to rotate weakness into these indexes and they’ll follow through with weakness below YTD lows. Its only a matter of time. Quite similar to bullish markets you’ll see relative strength rotation, in a bearish market you’ll see relative weakness rotation. Rotation is what keeps strong trends intact and in this case the trend is down!
Another important point to note and a deeper technical side is this. NYMO and NAMO remained very oversold, I suspected a big bounce was going to be imminent and we got one on Wednesday but once Thursday came around and the market didn't follow through on upside, we gapped down and never recovered even though the market had every excuse to keep rallying BUT it didn't.
Individual stocks all jumped on extremely low volume so that was a big tell that Wednesday's bounce would be short lived. Also the market has been seeing many intra-day bounces which only keep bulls hopeful and keep bears thinking a big squeeze is imminent. But these intra-day rallies all have failed and only help to alleviate oversold conditions and nothing else really. This market is in a stealth distribution mode and that's the best and only way to accomplish this task is by keeping bulls hopeful bears hesitant!
This is what has helped with my bearish conviction in our current Art of Trading short sided trades!
So, what has Art of Trading been trading lately?
Currently, the Art of Trading short term trading portfolio has two short side trades open! $AFRM and $ADM. I’ll explain what I see in these trades for you here:
$AFRM Trade Review – Short Side Trade
From 9/22/22 – Position Open
We took $AFRM short on September 22nd. The stock formed up a bearish flag type pattern on daily time frame charts. The short entry was @ $19.95. The buy stop is @$21.75. Short term target is @ $16
This technical setup alongside market weakness is what set this trade up! You’ll notice the “buy stop” is slightly above the high of the candle on the day that it confirmed the technical pattern.
Speaking of the buy stop, just as we talked about earlier the trade has a lot of breathing room to work. This is a key point for bearish, volatile market trading. Don’t be afraid to take smaller position sizes with wider stops as well!
$ADM Trade Review – Short Side Trade
From 9/27/22 – Position Open
We took $ADM short on September 27nd. The stock formed up a bearish flag type pattern on daily time frame charts. The short entry was @ $81. The buy stop is @$84. Short term target is @ $75 to $70
Much like the $AFRM setup we are following the same exact principles here!
Here is a look at the Art of Trading 2022 short term trades YTD:
I hope you’ve thoroughly enjoyed this update and small “trading guide” if you will. My goal with the Art of Trading is to create more confident traders and hopefully this guide can potentially instill some confidence in you too!
Cheers and happy trading,
Art of Trading
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