Have you ever wondered why we would entertain bearish trades if the market is in an uptrend? How does that jive with the oft-repeated admonition to “trade with the trend?”

Today I want to explore 3 reasons why a trader might still enter bear trades EVEN in a rising market.

Strategy Diversification

The first reason is for diversification purposes. A portfolio with 3 bear trades and 5 bull trades is less risky than one with 8 bull trades. Even though both accounts have the same number of trades, the former has less exposure. That translates into a less volatile equity curve. In other words, the fluctuation in account value on a day-to-day basis is less. And lower fluctuation ultimately means less emotion, which in turn means I’m more likely to stick to my plan and avoid making stupid decisions.

There’s Always a Bear Market Somewhere

A second reason for deploying bear trades in a rising market is that not every sector will necessarily be rising. There’s always a bear market somewhere. It could be a lagging industry or an individual stock with bad news or poor fundamentals. Take right now, for instance. The Nasdaq is hitting yet another record high today and is in a stellar uptrend. But GPN looks like garbage and has a bear retracement pattern. So do casinos like WYNN and LVS. Banks don’t look good either.

Shorting the likes of AMZN and AAPL would be nuts. But doing so in these weak stocks isn’t so crazy. Even though you’re going against the trend of the broader market, you’re going with the trend of the individual stock.

There can be room for both in your portfolio.

Increase Number of Trades

A third benefit of deploying bear trades in a bull market is that you can increase the number of trades you do without necessarily raising your portfolio risk. For example, if you have five existing bullish positions and add a bear trade, then you are lowering risk the portfolio risk.

As I’ve taught before (see here and here), there are two ways to increase your profitability: increase size or increase frequency. The latter is easier and less risky. If you want to ramp up your number of trades without overexposing yourself, then mix-in bear trades with bull trades.

What if I Don’t Wanna?

As great as the previous three advantages are, I won’t dispute the appeal of only trading in the direction of the market’s trend. Just ask anyone who has tried to squeeze profits out of bear trades over the past few months. It hasn’t been easy. If anything, it’s likely resulted in more frustration and fewer profits than those that decided in April to shift to only bull trades when the SPY turned to an uptrend.

However, when you only play on one side of the market, your account fluctuation will be wilder due to the higher portfolio delta. Also, if you have a cap on how large you let your delta get, then you won’t be able to make as many trades.

Perhaps that’s a fair trade-off. Perhaps not. As always, you make the call. Today’s comments should help you make a more informed decision.

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