How To Survive A Bear Market – Trading Rules And Guidelines

by Olivier on August 8, 2011

This is not simply a correction. This is most likely a new BEAR MARKET. And that is probably an understatement. This could turn out to be a really nasty bear market. We do not know yet how this is going to end. But this quote certainly nails it. It is part of my trading quotes section.

Many a healthy reaction has proved fatal. – Humphrey B. Neill

I was very defensive and managed risk prior to the recent collapse. You can re-read my thoughts and how my thinking changed over time prior to this melt-down.

I think it is now safe to assume we are indeed in a bear market. That’s why I thought it would be helpful to compile a list of quotes, adages, thoughts and rules related to bear markets. You can use this as a reference guide or survival manual.

First off, in bear markets the primary trend is down. As you know by now, my job as a position trader is to align my portfolio with the prevailing primary trend. Hence, the most important thing to keep in mind when dealing with a potentially ferocious bear market is the following:

  • In bear markets you are either in CASH or SHORT.

Keep this in mind. During bear markets most market participants give back most of what they made during the preceding bull market. They are still conditioned by recent history. They are still thinking in terms of ‘buying bargains’ and ‘buying the dip’. This is typical bull market behaviour. During bear markets other rules apply. They are more or less the inverse of what you are supposed to do in bull markets.

This is what characterizes bear markets:

  • Sellers are in control
  • Oversold often stays oversold for a long time
  • Markets drop a lot faster than they go up
  • Bear markets burn and churn accounts with long only exposure
  • Volume and liquidity can dry up but price can still drop significantly
  • ‘Cheap’ can get a lot ‘cheaper’
  • Hope is slowly destroyed
  • Vicious bear market rallies try to suck in traders to trap them
  • Expect lots of gaps to the downside
  • It takes a long time until market participants throw in the towel

This is appropriate trading behaviour during bear markets:

  • Either in cash or short
  • Sell the rallies mentality
  • Do NOT buy the dips
  • Do not even think about going long if you are not an active and experienced trader


I’ve been trading for more than 13 years and if I had to sum up what I’ve learned in all those years in a few sentences it would be the following: Contrary to popular belief, winning traders are not the ones who make the most during bull markets. Winning traders are the ones who give back the least during bear markets.

Some pieces of advice: In bear markets when trapped traders throw in the towel everybody rushes to the exit at the same time. Hencesurprise moves are to the downside’. I urge you to think twice before you buy something with a ‘this has to be a bargain’ mind-set. Do not try to pick bottoms. Be disciplined. Simply refuse to play the ‘bottom guessing game’. Let others do it. Capital preservation is key for long-term survival in the markets.

Remember: When in doubt stay out. Go to cash and stay in cash. Cash is a position.

Hope is a great falsifier. Let good judgment keep her in check. – Baltasar Gracian


Want to know when to be in the market and when to be out?
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