Embrace the Tough Market, It’s Making You a Better Trader
Here’s how to take advantage of down times in the market, to expect cycles of bullish and bearish periods, and become a better trader.
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Cycles are inevitable, but most investors fail to embrace them.
Investors are conditioned to believe that bull markets are good and bear markets are bad. That is the sort of simplistic characterization that exists on Wall Street, because it is easier to generalize about the market than to analyze and find the best new opportunities. We are supposed to hire Wall Street professionals to do that hard work, and when the dreaded bear is on the prowl, we will need their expertise even more.
The Inevitability of Cycles
The one great certainty of markets is the cycle of ups and downs. They are as inevitable as sunrise and sunset, but they can’t be accurately timed, and they always manifest differently. Cycles are never the same, but they are always the same.
Many investors fail to embrace the inevitability of cycles, and that results in periods of great pain. We don’t want to believe that the beloved stocks that have treated us well for so long are suddenly going to be thrown into the trash heap as market conditions shift.
The current market is getting harder. The leadership that carried us for so long is starting to shift. Names that worked like clockwork are stalling out, breadth is narrowing, and the easy trades are drying up. When the action starts to feel like that, it usually means that corrective action will hit, and talk about bear markets will build. At a minimum, we are moving into a tougher environment, and there is a good chance the months ahead will be a grind.
Most folks view that as bad news. I don’t. I grow excited about it because I know that it means a supply of new ways to make money.
When the action sours, the standard reaction is dread. Everyone starts bracing for the bear market they fear, the one that claws back gains and tests your patience until you give up. I understand the feeling and have experienced it many times. Watching leadership break down and your account pull back from the highs is painful, but you often feel helpless to address it, and the losses pile up.
I have been through enough of these cycles to know that a harder market is not something to fear. It is something to get ready for, because it is where the next set of great opportunities gets made.
Bull markets end, and so do bear markets. No one can tell you when. Anyone who claims to call the top or the bottom is guessing, and usually selling something while they do it. What I can tell you with confidence is that the cycle will turn, and when it does, a new group of leaders will emerge. They are never the same names that led the last run.
Optimism Is Not the Same as Bullish
The most important emotion you can cultivate as a trader is optimism. Not optimism that the market is going to go straight up, but optimism that you will always be able to find great opportunities regardless of market conditions. That is a meaningful difference, and you must embrace this mindset.
Being optimistic is not the same as being bullish. Bullish is a view about direction. It is a bet that the indexes go higher from here. I do not make those kinds of bets, because I have no idea where the indexes are going next, and neither does anyone else.
My optimism has nothing to do with the market’s direction. It is the confidence that, if I keep doing the work, I will find good trades no matter what the market throws at us. None of us knows what the market will do in the months ahead, but we can be confident we will find opportunities regardless. If you just keep plugging away, day after day, the opportunities are always there.
Why Tougher Markets Create the Best Opportunities
A harder market gets me excited rather than scared, because a tough market clears the field. When everything is running straight up, good setups are harder to find, because everything already looks good. It is when the action gets difficult that the next opportunities start to take shape. Stocks get sold without regard for merit. Good companies get thrown out with the bad. And while that is happening, the next crop of leaders is quietly developing, waiting for the moment buyers come back to sort through the wreckage.
I have come to look at poor market action as a necessary thing. Poor action is what creates the conditions for new opportunities to develop. Great traders celebrate bear markets and downtrends, because they are optimistic that a new supply of money-making trades will eventually come out of them. That sounds strange to someone who is in the middle of the pain, but it is exactly right. The misery is the setup.
I have said for years that bad markets don’t scare you out, they wear you out. The damage is rarely one dramatic crash. It is the slow grind, the countertrend bounces that fail, the sense that it is never going to end. That is what pushes people to quit, often right before things turn. The traders who keep showing up, who keep doing the research and building their watch lists, are the ones who are ready when the opportunities arrive.
That is why I don’t dread these markets. I embrace them. A strong market hides sloppy decisions and rewards bad habits. Everyone is a genius in a bull market. A difficult market is where the hard work gets done and where good traders separate themselves from the crowd. Great traders are born in bear markets. The key to superior performance is to keep your account close to its highs when the weakness hits, and then to be ready. If you outperform in bad markets, you will be far ahead of the game.
Aggression Paired With Discipline
Optimism by itself is not enough, though. Optimism is the mindset. It is the fuel. But you still have to act on it, and that is the part most people get wrong. The key to producing exceptional gains in the stock market is to aggressively buy the right stocks as they begin to make a big move. Great traders develop ideas and find opportunities, but they make the big money by implementing an aggressive strategy at the right time. You don’t try to guess when a stock will move. You embrace it as it moves and does what it is supposed to do.
That kind of aggressiveness only works when it is paired with discipline. Aggressiveness without discipline is just gambling. So the approach is to stalk the names you like, take small probing positions while you wait, and then press hard when the price action proves you right. You build the position as the market discovers what you already saw. That is how an optimistic mindset turns into actual gains. The confidence to be aggressive comes from process, not from a forecast.
So as the leadership shifts and the market gets harder, I am not bracing for the worst. I am doing my homework. I am raising cash, tightening up my stops, and building my watch lists. I am paying close attention to the names that hold up while everything else is getting sold, because those are the tells for where the next leadership is going to come from. The opportunities are forming right now, even if they are not obvious yet.
None of this means being reckless or pretending the worst is over every time the market bounces. Staying optimistic does not mean foolishly thinking the bottom is in. It means staying confident that if you keep doing the research and the chart work, the results will come back. I may not know when the hard part ends. I am certain that it will, and that the next round of opportunity is on the other side of it.
The market is getting tougher. That is exactly why I am optimistic, and even a little excited. The hardest markets create the best opportunities. I would much rather be hunting for them than hoping that poorly acting stocks will bounce.
At the time of publication, DePorre had no position in any security mentioned.
