Conceptual Strategies for Shorting Stocks in Bear Market

T

TradingLogic

I wanted to get some feedback...I've been backtesting and just began forward testing a system that is no more than a simple long term trend following strategy on stocks.

The system in the backtests performed well. I just began forward testing.

I was long only and as a result the system was much less active in down markets to reduce drawdowns. I am interested in adding a short component but I have experienced through backtesting and reading many articles that stocks are inherently difficult to short with a trend following system. I was just wondering on some very broad conceptual ideas that people have about shorting stocks. Those concepts may be "don't do it!" Or maybe there are some market psyche issues to dig into, or maybe some specific ideas you have utilized with success.

My goal is to one day to move to futures markets where long and short positions seem to behave very similar. In other words there is no inherent difference- one is going up and the other is going down.

But with stocks a simple trend following strategy that utilizes shorting seems to only increase drawdowns and reduce returns.

Ideas?
 
fan27 said:
I have not found any rules based strategies that work well with shorting stocks/stock indexes. I am not saying there aren't any, I am just saying I have not found any. What I prefer to do in a bear market is to catch a rally to the upside. This down trend reversal strategy works pretty well for that.

http://fasterbull.com/members/strategy-builder.php?id=810

fan27
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Looking at the longer-term worst performers (for example, over the last 6 months) is a good starting point. You will make a killing doing this in a year like 2008 and if you have a good strategy, hopefully even in a bull market you can avoid getting killed by catching some good shorts like JCP.
 
promagma said:
Looking at the longer-term worst performers (for example, over the last 6 months) is a good starting point. You will make a killing doing this in a year like 2008 and if you have a good strategy, hopefully even in a bull market you can avoid getting killed by catching some good shorts like JCP.
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Fan27, interesting site thanks....promagma, It just seems like the tails on the distribution of returns on a short position are not nearly as favorable. In other words catching a few big returns in stocks when long isn't as hard, but when going short my win ratio (around 50% ) remains similar but the big wins are much less big. So what I end up with is a bunch of small loses like in my long positions but at best, only some medium wins.

I like the idea that you mention above though with picking all-ready weak stocks during a bear market. What are your (or anyone's) thoughts about using options, specifically, buying puts during major bear markets. My initial thought is it would only make a difference if you don't define your downside very well. I.e. Loose risk management.
 
That's the problem, a big win on the short side is 50% but a big win on the long side is 100% or more. The strategy that I had like this, that came to closest to working and surviving bull markets, you will get killed if you are shaken out on sharp bounces, e.g. taking a series of 10% losses, so I had no stop loss and only used options to control risk.
 
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