In this article:

• “Calling” a recession grows closer
• Trading a bear market requires changes
• Traders need new strategies for downtrend

The current economic and market environment is a tale of two streets.

One view shows Main Street – small businesses across the land – pessimistic about the current economic state and the prospect of a recession.

The other view shows Wall Street – seating in the stock market driver’s seat – bearish, but not sold on a recession looming.

Both may be right and wrong at the same time as the recession is defined.

Being right or wrong in either view may not be important once recession officially hits and the economy and bear stock market sinks further into a downtrend.

(Check out the free video, above, for insight into trading this changing market.)

Economic, stock market woes fuel recession

In the uncertainty of this economy and stock market, take a look at what defines a recession.

A simple explanation of recession is a period of time marked by a significant decline in the economy that can last for months or years. Various factors lead into a recession such as higher unemployment, decreased gross domestic product (GDP), inflation, and lower sales throughout the retail sector.

A standard for “calling” a recession is two consecutive quarters of negative GDP growth in an economy. The U.S. GDP was down 1.4% for the first quarter this year, and the outlook for the second quarter is steadily declining. By comparison, the U.S. GDP was up by 6.4% in the first quarter of 2021.

Other factors can contribute to a recession, including war, supply chain issues, political turmoil, manufacturing losses, and decreased power of income or wages. Most of these factors are happening and/or growing worse in not only the U.S. economy but around the world.

As a recession takes hold, basically money flow slows down across the board. As an example, fewer people dine out, restaurants lose customers and income, business owners lay off workers, and so forth. This “contraction” cycle in the money flow can be applied to almost any economic sector.

The depth and breadth of a recession isn’t really known until it is in full effect. At that point, grinding a path out of recession before an even worse depression sets in is difficult and complicated.

An economic depression is an entirely different topic that can impact a society, country, or the world for generations.

Market reactions to a recession

As a recession takes hold, the stock market tends to trend alongside the environment of losses.

A bear market can be in play during a recession as stock market losses mount, much of it caused by recession factors. While a bear market doesn’t have to coincide with a recession (there was a bear market, but not a recession during the pandemic), expectations are that the current bear market will continue into a recession.

A “official” bear market is signaled by a 20% drop in the price of securities in the stock market. Those markers were checked off by mid-afternoon Friday, and then recovered into the close – barely scratching higher than flat.

The Dow closed at 31,261.90 points to eke out a .03% gain (adding 8.77 points on the day). The Nasdaq dropped to 11,354.62 points for a .30% slip while the S&P 500 barely broke above flat, gaining just .01% to 3,901.36 points.

The S&P 500 is often referenced as the benchmark for an “official” bear market. It has dropped from 4,796.56 to start 2022 to its latest close – over 18% in losses.

In this market, traders must keep in mind that the stock market is continuously cycling up, down, and sideways.

Traders and the stock market have experienced this down trending cycle before, and it will happen again.

Trading during a bear market

Navigating the stock market maintains a considerable level of risk, and trading during a bear market poses another level of risk.

Some would argue that trading in a down market is more difficult than a market trending to the upside, or a bull market.

Any direction the market moves, traders must develop sound trading skills and exercise proper risk management. These are strategies championed by the team at Simpler Trading.

Unnecessary risks are not the path to success in the trading world.

Learning the “ins and outs” of a bear market takes time, preparation, practice, and application of sound trading strategies. Many traders today have never seen a bear market in play, much less risked their own capital in such an environment.

Stepping back to review this downturn can help determine how traders want to proceed as the market and economy sink lower.

Looking for answers in a bear market

Trading is not a simple formula, i.e. 2 x 2 = 4. There are no variables in this simple, mathematical formula. The answer is always “4.”

In trading, even the simplest of formulas can have variables that must be considered before finalizing a trade setup. At any point in the process of collecting data, deciding on a strategy, and then planning a setup, the market can shift and throw off all calculations.

Sudden changes in the market can also derail even the highest probability setup in a matter of minutes.

Trading is risky. All traders lose. Not all traders win.

The goal of Simpler’s traders is to focus on identifying possible trade setups with the highest probability for a win – taking profits – while avoiding losses.

Areas Simpler’s traders are watching in this downtrend are:

• Bonds – Movement lower has dominated this area as interest rates move higher. The Federal Reserve has signaled continued rate hikes through the end of the year
• Sell The Rip – The opposite of “buy the dip” in a bull market. This is about catching a short rally – the rip up – and selling the pullback. Focus here is on the path of least resistance and selling the bounce.

Bear markets present a new set of challenges for traders, and those wanting to learn more about this environment should consider an upcoming free webinar.

Danielle Shay, Vice President of Options at Simpler Trading, is hosting “Shorting Canaries in the Coal Mine” on May 25 at 7 p.m. Central. This market has made big moves recently to the downside, doesn’t it make sense to learn more about how to trade in a bear market?

Also consider these additional insights from Simpler Trading to learn more about trading in this downtrend and connect with like-minded traders:

Swing trading vs. day trading

Swing trading can be defined as buying and selling securities over a time period from a few days to a few months.

Essentially swing trading involves holding overnight positions until there are targeted profits to take or exit the trade to avoid further loss. As swing trades develop over time, traders can determine if the trade is working for or against them.

An attractive aspect of swing trading is not following swing trades constantly on a computer screen and online trading platform.

Applying swing trading strategies in the market will vary among retail traders based on personal experiences and preferences. Each trader needs to establish risk tolerance and develop a personalized trading discipline.

Swing trading allows traders to research setups, risk, and trade entries/exits with less rush.

Swing trading is often suited for traders who want more control of managing risk.

Day trading works within shorter time frames and can be a significant change in mindset for many traders. Day trading, like all trading, has a high degree of risk. Any trades must be considered at 100% risk.

Day trading is focused on opening and closing trades in the same day, typically in minutes or hours. The strategy is to get in and get out of trades while targeting moderate profits across multiple trades in a shorter time period.

Market chaos isn’t the place to trade alone

At Simpler Trading we know the time commitment required to trade well.

That’s why we started the Simpler Free Trading Room. Trading requires learning skills and diligent research, and a forum designed to help traders how we fit into the world of trading.

You don’t have to trade alone – try the room today and get access to the trading insights and free classes.

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