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Trading The Short (Bearish) Side
The Truth Behind The Hype
There is a great deal of "hype" regarding aggressive market timing, with timing services
often advertising overinflated gains attained by trading both bullish (long) positions and
bearish (short) positions.
The truth is that market timers "can" make excellent gains trading both sides of the market. But
what no one tells you is that it takes more discipline and patience than most timers are willing
or able to give.
Using timing strategies that trade "both" bull and bear positions may take "years"
to beat a bullish only strategy. No one mentions that.
Read on for the "truth behind the hype."
Natural Upward Bias
There is a natural upward bias in the stock market. That bias results
in long periods of gains, during which there are many short but sharp corrections to the upward trend. These
corrections often do not last long and are "usually" impossible to profit from.
Often such corrections see most of their losses within the first few days. In fact, the markets can go for months and sometimes years without a tradeable decline. Declines must
be long enough and deep enough for market timers, especially mutual fund market timers, to take advantage of them. Seldom do the financial markets oblige.
The fact is, using bearish (short) positions during upward trending markets
often results in losses in those trades. Usually they are small, but they are losses nevertheless.
Typically we see many sharp corrections within long term upward trending markets, and
if they are severe enough, they will trigger bearish signals.
But if the upward trend is still intact, the markets will reverse back up just as sharply.
Often the resulting buying pressure causes traders to quickly exit short positions causing fast
reversal rallies.
It is hard on the emotions when these quick trades occur. But aggressive timers who take both bullish and bearish trades
know they must take "all" of the bearish trades because no one knows when the next bear market will begin.
All trades "must" be taken to ensure profiting when the bear returns. Bull and bear timers are
willing to take the small losses, knowing they will eventually realize the big profits when the next bear market begins.
Time Frame
Aggressive timers with a realistic time frame (several years or more) will certainly see a correction
that will be large enough to create substantial gains by taking bearish
positions.
But unless you have a long term horizon, and are willing to wait
for those big declines (bear markets), you are more likely to underperform a strategy
that takes "only" bullish positions.
This is just the reality of trading. Bearish positions are riskier than
bullish positions because the markets trend higher for longer periods of time than they decline.
This was the reason we added our "Bull Timer" strategy some years ago, which
follows the aggressive Bull & Bear Timer signals, but goes to cash during sell signals.
In both 2003 and 2004 it outperformed the Bull & Bear Timer because it did "not" take
any bearish positions.
Of course years 2000 through 2002 were bear market years and the Bull & Bear Timer
greatly outperformed all the other strategies.
But when will the next bear start?
Going For The Home Run
What market timers need to know is that there can be large profits made during long term declines (bear markets), but there can also be
multiple small losses during upward trending markets. These are usually small,
but they can wear down the emotions, and cause a timer to leave a strategy.
Bull and bear timers must be willing and able to stand this test of time.
Market timers who trade both bullish and bearish positions should "expect"
that they will "underperform" during long term advancing markets, but that
they will "outperform" during severe long term corrections (bear markets).
In short, those who trade bearish positions are going for the "home run."
But you must recognize that home runs are not hit every day. You may go
a couple of years between them, or even longer.
Aggressive market timers
should know their tolerance for risk and their tolerance for taking small losses, while
waiting for the big gain that may take some time to be realized.
If you feel you cannot stay the course for such a time frame, use bull only
timing strategies which go to cash during sell signals.
Conclusion
Don't be swept off your feet by hype and advertising. Bull and bear strategies work, but timers who trade them must
be prepared to stay with them for long periods of time.
At FibTimer, even though we have been market timing since 1980, our preference is to take bullish positions. We trade our own accounts using the Diversified Timing Portfolio
which allocates only a limited amount (20% maximum) to bearish positions.
Remember that even if the results of trading bull/bear strategies vs. bullish only strategies were the same, there is less market exposure if bearish (short) positions are not taken. This decreases overall risk.
Be sure you understand that taking bearish positions, while very likely
to be more profitable over time, almost always results in "under performance" during
long term upward trending markets.
Yes, bearish positions do result in large gains during bear markets such as we experienced in 2000-2002,
but such declines are not every day occurrences.
FibTimer Subscribers
At FibTimer, we offer strategies with both long and short trading because many subscribers
want them. Be sure you understand that taking bearish positions, while it very likely
to be more profitable over time, almost always results in "under performance" during
long term upward trending markets.
We offer many bullish only strategies with excellent long term performance. The Bull Timer and Sector Timer for active market timers. The Conservative S&P and REIT Timers for
conservative timers.
If you trade the ETF and Stock Timer strategies, but did not realize that short positions often result in small losses before finally
paying off, consider taking long only positions. It can be quite profitable.
"Long Only" results have been added to both the ETF Timer and Stock Timer trade history pages so you can compare long only results to using long/short. To see bullish only results for the Bull & Bear Timer,
check the trade history for the Bull Timer strategy.
Recent articles from the FibTimer.com market timing services;
The Basics On Fibonacci Ratios & Elliott Wave Theory
Which Is More Important To You... Being Right, Or Making Money?
Trading Trends; Yesterday, Today & Tomorrow
Immediate Profits vs. Delayed Rewards, Which Is The Key To Success?
The Grass May "Not" Be Greener On The Other Side
Sector Timing - Diversified and Profitable
It's All In How You Play The Game
Predicting The Future
It's Different This Time
A Closer Look At "Price"
Investor vs. Trader...Which Are You?
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All Rights Reserved.
FibTimer reports may not be redistributed without
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable. |
