Swing Trading in a Bearish Market: My Perspective
“Should I refrain from trading today because the market sentiment is poor?”—I imagine many of you have experienced this hesitation on days when the overall market is unstable. I feel that swing trading during a bearish market is a topic where opinions vary from person to person. Today, I would like to organize my personal thoughts on how to approach trading during these difficult times.
What exactly is a “bearish market”?
“Bearish market” refers to a state where overall market indices, such as the Nikkei 225 or TOPIX, are in a downward trend, and investor sentiment is cautious or pessimistic. It is a phase where selling pressure is easily applied to the entire market, regardless of the performance or news of individual stocks.
During a bearish market, even stocks with positive news tend to struggle to find buyers, while they are prone to overreacting to negative news and being sold off, leading to asymmetric price movements. A major characteristic of this period is that individual chart analysis becomes less effective than it is during normal times.
Market deterioration can be caused by domestic-specific factors, or it can be triggered by external influences such as sudden drops in overseas markets, changes in global monetary policy, or geopolitical risks. When you feel the market sentiment is poor, it is helpful to check whether the cause is domestic or international, and whether it is temporary or structural, as this makes it easier to form future outlooks.
Risks of trading during a bearish market
Continuing to swing trade during a bearish market involves several risks. First, no matter how well-formed a chart for an individual stock may look, the risk of being caught in an unexpected decline due to the overall market’s downward trend increases.
Also, during a bearish market, price movements tend to become unstable, and stop-loss lines that would normally function can sometimes be skipped over more than anticipated. It is necessary to understand in advance that risk management based on normal market conditions may not be as effective.
Furthermore, one cannot overlook the psychological risk that investor sentiment itself becomes unstable during a bearish market. As situations with unrealized losses increase, it becomes harder to make calm decisions, and it is not uncommon to end up making emotional trades that ignore your original rules. You need to be aware not only of the risks of the price movements themselves but also of the impact on your own judgment.
Even so, I do not believe it is necessary to stop trading completely
I have focused on the risks up to this point, but personally, I do not believe you need to stop trading entirely just because the market sentiment is poor. This is because there are reasons for price movements even in a bearish market, and it is entirely possible to face them cautiously once you understand those reasons.
In fact, because many investors are passive during a bearish market, there is an aspect where you can trade in a less competitive environment if you can make decisions based on solid grounds. Rather than avoiding it completely, my personal stance is to approach it “more cautiously than usual” rather than “as usual.”
Reducing position sizes more than usual
When continuing to trade during a bearish market, the thing I am most conscious of is making my position sizes smaller than usual. Since price movements are prone to instability, by keeping the risk per trade lower than usual, I can limit the damage even if an unexpected decline occurs.
If you try to force yourself to continue trading at the same scale as usual, you end up taking on the uncertainty caused by the poor market sentiment as your own risk. I feel that the decision to reduce the scale, even if you continue to trade, is essential.
Making stock selection criteria stricter
During a bearish market, I am also conscious of making my criteria for selecting stocks stricter than usual. I narrow my focus to stocks with stable performance that are less likely to collapse regardless of market sentiment, or stocks with clear positive news, and I try not to touch stocks with weak foundations.
When the market is good, even slightly loose criteria can lead to results, but when the market is poor, the strength of your reasoning is more likely to lead to differences in results. By tightening my criteria, the number of trades decreases, but I prioritize increasing the quality of each trade instead.
Always keeping the option to “take a break”
And above all, what I value most is keeping myself in a state where I can always choose the option of “taking a break today.” If you continue to force yourself to look for trading opportunities during a bearish market, the risk of entering trades with weak foundations increases.
Some people may feel resistant to taking a break, but choosing to wait until market conditions settle before engaging again is a perfectly valid strategy. I feel that waiting patiently for an opportunity is more likely to lead to results in the long term than forcing trades and losing capital.
Summary
Regarding swing trading during periods of poor market conditions, I personally believe that while it is not necessary to avoid it entirely, it is important to approach it more cautiously than usual by reducing position sizes, tightening criteria for stock selection, and keeping the option to take a break if necessary. I feel that not ignoring the broader market trend and adjusting the intensity of one’s approach according to the environment at the time leads to protecting and growing assets in the long run. I believe that the flexibility to change one’s stance according to the environment, rather than continuing to trade at the same pace regardless of whether market conditions are good or bad, is an essential skill for staying in the market for the long term.
※This article is intended for general information and sharing perspectives on the market, and does not recommend the buying or selling of any specific stocks. Please make investment decisions at your own responsibility.