One of the things I’ve noticed in the student base of traders, which is happening over and over again, is how you think about your trading dramatically impacts the way you feel about it and how effective you are at placing trades.
Many analogies can describe the market, but it’s essential to get your thinking right as a trader so that trading becomes an exercise or an inflow activity rather than fighting the market.
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Seasons in the Market
Think about the seasons and the weather that we have on planet earth. We go through seasonal cycles every year which is spring, summer, autumn, winter.
In summer, generally, you think and expect that you should be able to wear shorts and a t-shirt depending on where you live and go outside and have fun weather. Every now and then, you get an unseasonably cold day, and you wear a jumper, or you take an umbrella, and it puts a bit of a dampener on your summer experience, but it’s not permanent.
In winter, the opposite is true. If you’re going to survive winter, you dress yourself up, you wear jumpers and warm clothes, and you take an umbrella because it’s probably going to rain. And now and then, you can get an unseasonably warm day, but that doesn’t mean winter is over.
And one of the things I noticed a lot in online trading communities, particularly in crypto trading communities and in stocks to a lesser extent, is that when there is an unseasonably warm day in winter in the market, crypto traders say like, “Oh, it’s over, quick buy. The bottom’s in.” And they load up on the long side, and then they wonder why they get smashed two or three days later when the unseasonably warm day in the winter market has come to an end.
And same in summer, when traders are getting nervous and jittery in a bull market. And there’s a couple of big down days because there’s a bit of nerve in the market. It doesn’t mean the bull market’s over, and yet people will dump their entire positions and trade like the end is coming, go to cash or go short just because of a bit of blip in the market.
Bull Market Seasons
Think about trading in the markets just like the seasons. When you are in a bull market, you should generally expect prices to go up. Although you know it’s not going to go up smoothly and consistently every day, you’ve got to expect that there’s going to be some fluctuations on the journey.
On the other hand, there’s also going to be a lot of profit to be had if you stay the course and ride the bull market all the way through. This is why trend following is so powerful. If you’re trying to snatch little profits from every move in the market, it’s a lot of activity; you get stressed out and burnt out as a trader.
If in a bull market, you implement a trend following system that follows the entire trend, keeps you in the market for the whole bull market, then trading is easy. And when there’s a slight dip in the bull market, just like when there’s a cold day in summer, you don’t freak out and think “Oh my god, winter is coming,” and you sell everything and go to cash. You just got to ride through it. It’s far more profitable in the long run and far less stressful.
Bear Market Seasons
When there’s a bear market, every little bounce does not mean the bear market is over. Those little bounces are just people hoping that the good news means that the bear market is over. So when you’re going out in winter, right? And there’s an unseasonably warm day; you might take advantage of that one day. You might put on shorts and a t-shirt, get on the beach, enjoy the sun, that sort of thing for the day. Because you know it’s warm that day, just like in the markets, the market might be going up that day. You can have a very short term approach where you could profit on the long side in the middle of a bear market. But you’re not in winter just because you have one warm day; you’re not going to put your shorts and t-shirt on and go camping for three weeks with nothing but shorts and a t-shirt. It’s crazy because you know the cold weather is going to come back.
In the markets, it’s the same thing. If you’re in the middle of a bear market, the markets are going down; just because you have a couple of up days does not mean it’s over. We’ve got to think about the longer term, a bigger picture just like you do with the seasons in everyday life. None of us is stupid enough to go camping in shorts and a t-shirt in the middle of winter just because we had one warm day.
Yet traders all over the planet see one bit of an uptick in the middle of a bear market and rush in, expecting that the market’s over. You need confirmation that the bear market is over. You need confirmation to know that winter is over in the seasons as well. Look at your watch and the date and check because you know what that cycle is. The cycle is not so beautiful in the markets. It changes. The bull markets and bear markets and different durations.
But you know that it’s warming up in the real world when the garden starts to grow, the grass gets longer, you have more consistent sunny days in a row, all of those things. And in a bear market in the stocks or crypto, it’s the same thing.
When the market starts consistently going up, it starts making higher highs, starts making higher lows. The pullbacks are not pulling back to new lows; there’s a small pullback in the rally and then another rally and a pullback and another rally and a pullback, but all the time it’s going higher, that’s when you know that the bear market is over.
You can judge all of this or put a system in place to do exactly that. And this is the method of trading I would suggest for the majority of traders.
A systematic approach is way better than trying to judge it because a systematic approach will say, hey, look, there’s a small up day in the middle of a bear market. This system can profit from it. And the rules will jump on it, take the trade, get in, get out, and make money. Or the system will say, “Hey, look, there’s a bull market, and there’s a dip,” but that dip is not big enough to prove it’s a bear market yet. So, I’ll keep riding my long positions all the way through and profit from the entire bull market.
The system takes all of that guesswork away from you. It’s kind of like having your weather forecast. You don’t need to predict the future, but you need rules to tell you what to do. And in trading, a systematic approach is what does that.
What is the best way to profit from the different seasons in the market?
The best way to profit from the different seasons in the market, bull, bear, and the temporary dips and blips that go on, is to have different trading systems. Different trading systems that profit from the bull markets, that profit from the bear markets, and that profit from the dips and rallies in each of those against the primary trend.
The biggest trap is predicting that the market is changing based on minimal data. So if the market is going down and you get a couple of green bars or green candles, and the market starts going up for a couple of days, the bear market is not over.
Wait for higher highs and higher lows and maybe across above a long term moving average and all of those sorts of things for confirmation. And until you get that confirmation, the way you need to trade is much shorter term.
If you’re trying to profit from the rallies in a bear market, you better be nimble. You better have a short term system, short term set of rules. Because if you try and trade long term in a bear market on the long side, you’re going to get smashed.
Just like in winter, when you have a sunny day, you can put your shorts and t-shirt on, you can get on the beach for the day because it’s a warm day, but you don’t go camping for a week in your shorts and t-shirt because that’s stupid, right? So, treat the markets the same way.
We’re going to think, “what season are we in? Are we in a bull market or a bear market more broadly?” The way you tell that is you look at the chart, and you zoom right out. One of the best tricks I ever heard is if you print a chart out and put it on the wall, the opposite wall of the room, you stand back and look at it, if it’s going up, you’re in a bull market. If it’s going down, you’re in a bear market. It’s that simple. And you should be trading in that direction. And if you’ve got a system, which is the best way to trade, then your system should have those rules built into it.
Alongside trend following system, we should only be trading when the bear market is going up and when it’s a bear market. The price is above long term moving averages. So this is the way I want you to think about trading, so you didn’t get sucked into believing that the market has changed just because of one little dip or blip.
Particularly in crypto space, when the markets are volatile, people are hypey, and many are trading on emotions. So, putting a system in place helps because it eliminates all of those emotions. It makes it far easier to judge what you should be doing because it tells you exactly what trade to take.
If you want to trade in a bull market, good. Suppose you’re going to trade in a bear market, good. But have a system that guides you and make sure that system fits the market state.
In a bull market, you want long term trend following, and you want to buy the dips with a mean reversion system.
In a bear market, you want a momentum system to the downside, which gets out failing nimbly when the market starts to rally, and you want to sell the rallies so that you can profit from the bear market. And your system will do all of that for you.
If you want to improve your trading, then the next best step is to get a systematic approach in place; whether it’s stocks or crypto, it doesn’t matter. And, in both of those markets, the vast majority of successful traders are systematic because it eliminates the emotion. So you got to get a systematic approach in place, and you’ve got to diversify your trading systems, have multiple trading systems.
If you are not yet systematic but you want to learn how, comment below “systemize.” And if you are already systematic, but you need to diversify so that you can make money in more different market conditions, I want you to comment below “diversify.” Depending on what you are, I’ll reach out and give you some resources to help you take the next step.