When a Bear Loves a Market

What makes a bear market a bear market? Price dropping 25%? Utter rubbish!

What if the whole correction was 25%? You are allowed to start shorting the bottom? What about what went down while price made these numbers?

What do you need to survive in a bear market?

  1. Acknowledge the change
  2. Learn new risk management

1.

A bear market is when the market is able to separate from its own shadow: the usual safety mechanisms do not work, and the direction can be to the up side as well as the down side.

Volatility is one thing. It got a bump up by 30% since the BRExit.

Now, the daily expectation on average is 105 pips versus the 80 prior.

This does not however explain the breach of the energy bands and the occasional 300 pip days.

The telltale of the market change is when unusual stretches appearing repeatedly.

The shadow of the market is the E32 on the hourly (orange).

The white circles are highlights of the areas threatening with separating from the shadow.

What comes after this is a one way freight train. This is what the bear market makes possible.

The stretch from the mean itself in a regular market does not exceed a 4x fluctuation maximum multiplier.

On the upside this stretch recently reached a whooping 9.5!

The perforation line was added to better gauge a 4x stretch.

Mean reversion was inevitable, but the market only obeyed after the wave structure was finished to the upside. The 60-pips gap up kicked off the wave 3 of Wave 5 (think wave 3 upon seeing a large gap) only to embrace for another 150 pips rip to the upside during a normally quiet Asian session, when EUR and USD are not heavily traded.

There were these two large gaps that are visible on the 4H chart still.

2.

Risk management.

You need to start learning new terms, such as personal maximum unhedged risk.

You now know, that 100, even 300-pip range days are possible currently. If you snooze, you can very easily loose everything.

You must have enough cushion to withstand 100 pips as a surprise in general,

so for instance based on the equity and the leverage, you figure that you could afford a maximum draw down of $100 per ten 10 pips, that means you must have an additional $1000 cushion available to cover margin, and you better become a proactive hedger.

You would have to monitor for drops greater than 20% below your maximum unhedged risk in your equity margin. A ratio hedger is needed, yes, but I would also recommend to learn the roll out system.

The roll-out system would come with IH (Indefinite Hedge) levels based on the separation of the market from its own shadow: to catch the freight train.

You must take on a hedge at these IH levels and then monitor for the activity around the Check Point levels. In general, you want to see the market surpass a check point and then come back through it: just trail you stop and monitor for changes every hour, and once the trail was hit, place a roll-out hedge for more atrocities 20 pips beyond your disconnection.

More cash flow and more margin can always help.

I have made these routines, yes. Did you want to ask something?

The bear works in both directions, in fact the bear does not even care which way is down.

The bear cares about 1 thing only. Causing maximum amount of damage.