Seven Stages of a Bear Market

Woody Dorsey in his book “Behavioral Trading” speaks to what he calls the Seven Stages of a Bear Market:

1. Mania – Peak of Dot-com Bubble, December 1999.
2. Denial – After falling sharply, the market rallied in summer-fall 2000.
3. Hope – Though the market fell again, it rallied back in summer 2002.
4. Recognition – The market plunged after the 9/11 terrorist attacks in New York.
5. Reprieve – The market rallies steeply (forecast).
6. Liquidation – The market sells off and slides definitively (forecast).
7. Capitulation – The market bottoms (forecast).

In an after the fact analysis, these points hit home and provide great food for thought. Just remember though, to trade in the present will require a strategy that answers the following 5 questions:

1. How do you determine what market to buy or sell at any time?
2. How do you determine how much of a market to buy or sell at any time?
3. How do you determine when you buy or sell a market?
4. How do you determine when you get out of a losing position?
5. How do you determine when you get out of a winning position?

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