The subject of bearish trading is not very popular today. Naturally, one would rather buy than sell because the financial markets rise more often than it fall.
This article will help one to know who is a bearish trader (short seller), and what bearish trading tips and tricks do work. Let's get started.
What Is A Bearish Trader?
A Bearish trader is a financial market player who is looking for very good excuses to sell financials instruments that are overbought or already in a downtrend (correction) after a bullish trend.
There are bearish traders and investors. Most bearish market players are hedge funds, professional traders, and sophisticated investors.
Another group of bearish traders and investors that no one is talking about are bullish market players that are closing their bullish positions or divesting.
They must sell. So a bullish trader that is selling is a bearish trader. In fact, huge market drops are due to the stampede of bullish traders and investors that are rushing to the exit door. That is amazing. Is not it?
The next time you hear some bullish investors complaining about bearish traders, please do not take them seriously.
The bearish traders only sell wildly when they smell the blood. I mean when bullish investors are afraid or closing under pressure their initial bullish positions. The truth is that when everyone is selling the markets will decline.
One can bet on that. Why?
The majority of market players are bullish, and if the majority is buying the market will struggle to decline. Having said that, just a few large institutional investors with a tremendous firing power can cause a market fall. That is another story altogether. We will get back to that later.
All in all, all market players are bearish at one stage, but there are bears (born a bearish investor) that sell the rallies, markets' tops, overbought financial instruments and sectors, bearish divergences, discrepancies and most importantly instruments that have failed the Google finance acid test or do not have a brighter future.
A bearish trader or investor is commonly known as a bear. The opposite of a bear is bull (bullish trader) in the financial markets trading's jargon.
Now that one understands what is a bearish trader or investor, let's discuss what bearish trading tips that work.
Bearish Trading Tips That Work
All financial instruments (without exception) that are truly bearish must form lower lows and lower highs. That is a market principle.
It is universal and applicable to all financial instruments. It is simple and clear. I like that. Consequently, one has a good excuse to sell if a financial instrument exhibits a lower high on the edge of a declining channel after a lower low. Pretty simple; isn't it? Not really.
One must learn to sell like a pro using a top-down trading method without ignoring both the fundamentals and economic news.
I will be writing an article about how to sell like a pro in a near future. Please stay tuned.
One can also sell if a company is in financial difficulties. Most of those companies will often fail the Google finance acid test. In those circumstances, one has a fundamental reason to sell, but one must always combine the fundamentals and technical analysis.
Indeed, a company that is not coping with the competition, losing market share and above all not making money (revenue going down year after year) is intrinsically bearish.
Warning Please, never sell a financial instrument just because of a technical or fundamentals reasons but both. Also stay tuned to the economic news.
One can also be itching to sell a financial instrument that exhibits a lower high after a higher low. It is one of the most powerful reversal chart pattern. I like to call it a denial pattern. I love that pattern.
One will also be ready to sell if the a financial instrument exhibits a lower high after a double top. Just be sure not to sell into a support level. Those who knows how to sell will be alright. One will adopt the same mindset after a lower high that appears after a head and shoulder chart pattern.
Always use the bearish watchlist when the market SP 500 (major indices) is bearish. I mean buy another day. Look for an opportunity to sell when the market is bearish for short term gains.
Try also to avoid fighting the market when the market is in a declining channel mainly on the monthly chart. It signals a bearish sentiment. It is time to concentrate on the bearish watchlist.
A smart bearish trader is always very careful and prefers to stay way from a company that regularly pays juicy dividends. I am not saying that it is impossible to sell them but they can be hard to sell because the income investors will be loading it as a bear is trying to get some red juice (sell).
Believe it not, few hedge funds went bust just doing exactly that mistake because they wrongly thought that with their big bank account they will force the stock down. Be aware of the income investors when selling for a medium term purposes. One can get away with it in the short term, but one does not want to hang around too long and get fried like the Kentucky fried chicken (KFC).
Companies that do not pay dividend but accumulation large activities cost like precious metal and crude explorers are good bearish candidates when they become technically and fundamentally bearish.
One can become a better short seller if one also masters chart patterns trading and candlestick patterns. I do not know why there are so many technical traders who never bother to master the candlestick pattern trading. I do not get it. Candlestick patterns do help.
Also, many traders thought they know everything about chart patterns but that is never true. One that is using candlestick and chart patterns must always check the financials and eco news. It is a mistake not to do so. It is still going on everyday though.
A bearish trader or investor love bearish financial market sectors. Well who can blame them. I will not. A quick Google and YouTube search for phrases such as "Number one bearish sector this year xxxx" "Bearish sectors this year xxxx" "Financial market sectors that are bearish this year xxxx" will help one a bit to keep the ball rolling.
Obviously, one is more likely to find good bearish instruments in a bearish sector than a bullish instrument. At the same time one must be very careful and avoid selling oversold financial institutions in a bearish sector.
A bear should avoid selling financial instruments that are in a rising channel. It is always risky to sell in a rising channel. As long as the price-action did not break below the rising channel, do not rush to sell because of the wave extensions.
Elliott wave traders love to punish those courageous bears that are selling during the Elliott wave extensions. Be aware of the fifth wave extensions. Another dangerous wave extension is the fifth minor wave extensions of the fifth wave itself. May God have mercy on those who do not bother to master the Elliott wave trading.
I mean it 100%. It is not too late to begin to learn it. I did the same thing in the past. Am I barking too much? I hope not.
Watching Trading Volume As A Bear
One of the powerful tools in the arsenal of the bears is the trading volume. They want to combine the bearish momentum with the bearish fuel.
Warning Never sell for medium or long term purposes based on the bearish momentum alone. Use both the momentum and trading volume. I would not mind if one quotes me on that.
It is always the same story on the monthly chart. One will spot a well above average trading volume, and one takes note of it, and wait for a bearish trading setup. Any technical bearish setup that I have previously discussed or high probability bearish trade setups that appear after a real surge in the trading volume must be added to a bearish watchlist.
That volume surge is the fuel. The bearish setup is the excuse one is looking for to deploy a top-down trading method that works. I highly recommend to all to master the trading volume like an expert.
Please check the playlist below
Becoming A Sophisticated Bearish Trader Or Investor
To cut a long discussion short, I would say that it makes sense that a bearish trader or investor who does not want to be rolled in wheat flour (kicked around), must master the Elliott wave trading and forecast. He or she must also master Fibonacci trading and Fibonacci patterns.
Indeed, one that falls short of those skills will struggle as a bear or short seller. Really, it is not easy to sell and hold for the medium or long term. Anyone can sell in a short term. That is why even hedge funds do struggle to hold on to a bearish position without being forced to close their bearish positions.
It is really helpful that a bearish investor or trader master the corrective waves. The key to become a better Elliott wave trader is to master all the corrective waves.
These bearish trading tips and tricks will give one food for thought, and allow one to start a new journey as a bearish trader. One must only sell when it is fundamentally and technically justified.
Please ask the following questions. Is it technically bearish? Is it fundamentally bearish? Once those two conditions are positive, one must now deploy a different times frame trading strategy to take positions. One should avoid entering a bearish trade on a day when the market is very bullish. That would not help.
I hope this article will useful to many. Please bookmark and share it if you think it deserves it. On my side, I enjoy writing it, but it is now time for me to start writing about how to sell as a bearish trader or investor. Please stay tuned because I will be back soon with another article. Thank you for reading it.
Please post relevant questions and comments at 24stocktrader YouTube channel, and in due course I will be back to you.