Learning to trade in a bearish market is, perhaps, the biggest skill an investor can master. When everything is running smoothly and share prices are on the up, putting your money into virtually anything can turn a profit.
During the dot.com boom, putting money into almost any tech start-up realised a healthy return. In more recent times, the crypto boom of 2017 meant that even the most inexperienced investors were able to make money by taking a shot at digital coins they sometimes knew nothing about.
However, when things aren’t booming and bearish trends are everywhere in sight, finding opportunities can be tough. For those with an eye on the Australian market heading towards 2019, the US-China trade war is upsetting the proverbial apple cart. Throughout the year, political tension has gradually increased. From Donald Trump imposing tariffs on China and Chinese Finance Ministry doing the same back, 2018 has become a tit-for-tat war between the two superpowers.
As is often the case when either of these countries makes a political move, the rest of the world feels the consequences. These knock-on effects are often first felt by the financial markets and, in recent months, Wall Street has seen share prices across the board take a tumble because of the US-China trade war.
Despite being more than 15,000km away, the shockwaves are starting to spread across Australia. Indeed, with Wall Street taking a hit, the ASX dipped below 6,000 points at the opening of October. With the IMF cutting its forecast for the Aussie economy following the downturn, trading conditions for everyone have worsened.
Taking a measured approach
However, it’s during a crisis that the strong thrive. For those that can trade successfully in a bearish market, now is a great time to be active. While trading in tough conditions isn’t easy, there are some fundamental skills traders can use to get ahead of the curve. The first is to look for options. Diversity is crucial when markets are bearish. Trading online opens up 15,000+ markets, for example. This means you can scan international markets, from Australia to Germany, in an effort to find positive opportunities. What’s more, when you trade online, spreads are low. Because of this, aren’t wasting money on fees.
In addition to opening a diverse portfolio, Dr Alexander Elder, author of Come Into My Trading Room, advises novices to think small. Opening a handful of small positions, “perhaps 100 or 200 shares”, is Elder’s advice to anyone entering markets on a downswing. What’s more, when you trade online, spreads are low. This means you aren’t wasting money on fees. Once you’ve opened your positions, the most important indicator to analyse is “new high-new low”. This index tracks stocks that are reaching new highs and those that are hitting new lows.
Look for the outliers
In a downswing, stocks hitting new highs will become outliers and, therefore, easier to identify. In a vacuum, investing in the outliers is a way to make some short-term gains. However, what’s more important is divergence. If the market is falling but the number of stocks making new highs is increasing, a bullish trend is on the horizon. If the market is rising but new highs are decreasing, the opposite is true. Therefore, if you can compare the market line against the number of new highs-new lows, you can, potentially, see when the boom period is developing.
In essence, the advice here is to get in early, start small and spread your investment. Once you’re in, look for signs that things across the board are going to improve and start upping your trading volume. Despite the ASX suffering in recent months, Australia’s economy is thriving. Commercial construction rates are up, tech companies are setting up in Australia and things are generally moving in a positive direction. These are all indicators that the markets are fundamentally strong. Indeed, remove the US-China trade war and share prices would likely be trending upwards.
As an investor sizing up a bearish market, this should be great news. When you know the underlying product is strong but market sentiments seem to be saying the opposite, it’s a good time to invest. Naturally, nothing is ever certain in the trading world, but having a clear strategy and your own judgments on the economy can swing the pendulum in your favour. Indeed, if that’s possible, there is still hope for anyone looking at the current state of Australia’s financial markets, regardless of how the US-China political battle ends.
Executive Editor at Best in Australia. Mike has spent over a decade covering news related to business leaders and entrepreneurs around Australia and across the world.