Keep in mind that there are two sides to every trade: The Bulls & The Bears. There are many reasons why the market performs one way or another, and here are some helpful tips to help you manage your trading in a Bull or Bear market.
Measure the Bearish Side – Short Interest
The bulls want the market to go higher and the bears want the market to go lower. Typically the bulls go “long” and the bears go “short” in order to express their view. The most common way of measuring the bearish side is to look at short interest. Short interest is the percentage of shares sold short vs the number of shares outstanding. For example, 2% short interest means that 2% of the outstanding shares are held short.
Fuel For the Bulls: Short Covering
Keep in mind there is only one way for a market to go up and that is if there are more buyers than sellers. This can occur in two ways. The first set of buyers are new buyers that show up and buy shares. This can be for any reason but they all believe, for one reason or another, that the market will head higher after they buy. The second set of buyers are short sellers who are throwing in the towel and covering their position. When you short a stock the only way to exit your short is to buy the shares you sold. So as the market rallies the short seller’s loss grows and they eventually exit their position. This new set of buyers helps send stock prices higher and is known as short covering.
Filter Out the Noise in a Bull Market
Successful traders know how to filter out the noise and focus on what matters most – the facts. The best way to study the facts is to look at the price action of the market. Right now we are in a very strong bull market and the path resistance is higher until this very strong bull market ends. I’ve learned a long time ago to trade on what I see happening and not on what I think should happen.
