May 23


A Simple Trading System For Trading In A Bear Market

By Jeff Swanson

May 23, 2022

automated trading, Automated Trading Development, EasyLanguage, ES, futures trading, mean reversion, S&P Emini, trading system

The major stock index markets are below their 200-day moving average. That's bearish!

A bear market can be a trader's worst nightmare. Prices are falling, volatility is high, and everyone seems to be selling. How can you make money in this type of market? One approach is to short counter-trend rallies in the stock index futures markets. Does such a system exist?

We'll review a simple shorting strategy in this article and see if we. Can take advantage of the downtrend and potentially make some profits. So, how does it work? Let's take a look.

Over the years, I've looked at several straightforward long strategies published in the book "Short Term Trading Strategies That Work" by Larry Connors and Cesar Alvarez. Those articles include the following long strategies:

Buried within Connors and Alvarez’s book, you will find one simple shorting strategy used on the major market indices. I will review this strategy in this article and see if we can improve it.

A Simple Shorting Strategy

The rules of this system are very simple.

  • Price must be below its 200 day moving average.
  • If the instrument closes up for four or more days in a row, sell short at close.
  • Cover your position when price closes below a 5-day SMA at open of next bar.

The trading model is straightforward and attempts to fade strong bullish moves when the market sentiment is bearish. By only taking trades when the market is below its 200-day SMA, we ensure bears are in control. We then attempt to sell into short-term bullish strength as defined by four days of consecutive market advances.Below is a screenshot showing example trades on the E-mini S&P. Click the image for a larger view.

Simple Shorting Strategy Trade Examples

Simple Shorting Strategy Trade Examples

Unless otherwise stated, all the tests performed in this article will be based on the following assumptions:

  • Starting account size of  $100,000.
  • Dates tested are from 2000 through May 12, 2022
  • There are no deductions for commissions and slippage.
  • There are no stops.
Simple Shorting Strategy Equity Curve

Simple Shorting Strategy Equity Curve

Simple Shorting Strategy Annual Returns

Simple Shorting Strategy Annual Returns

Not very impressive, with only 26 trades since the year 2000 we only generate 3.51% return on our capital. But this is expected as shorting is very difficult for the stock index markets.

The stock market indexes have an upside bias (trading above the 200-day SMA), so this strategy does not have the opportunity to open many trades. Thus as the strategy stands today, we're not capturing enough profit to make it worth pursuing. This is a similar result I wrote about in this article, “The Death Cross – What You Need To Know.

While I don’t expect much change, I loaded this strategy on the major futures index markets (NQ, YM, RTY). Below are are the results.

Simple Shorting Strategy





Total Net Profit





Profit Factor





Total No Of Trades










Avg.Trade Net Profit





Max Drawdown (intraday)





The clear winner is the RTY market. It has a wonderful looking equity curve, pictured below, but of course, it still suffers form lack of trades.

Simple Shorting Strategy Equity Curve RTY

Simple Shorting Strategy Equity Curve RTY

Generating More Trades

The main problem with this strategy is the lack of trades. Can we generate more trades? I think so.

The original rule to open a new position is to look for 4 consecutive up days. So, we're looking for a counter-trend rally but, why four days? Why not three days or five days? Let's make this entry rule a bit more dynamic.

Larry Connors is well known for popularizing the 2-period RSI. The well-known rule to go long the stock index market when the 2-period RSI goes below 20 is a solid buy signal during a bull market. Let's reverse this idea for a bear market.

We will make an important change. Because bear markets tend to be much more volatile, I'm going to double the RSI look back from two to four. I think a 2-period look back will fire off too frequently. In bull markets, we can have strong countertrend rallies and we don't want to short too soon into those rallies.  

So, our sell short rules will now look like this:

  • Price must be below its 200 day moving average.
  • The 4-period RSI must be above 75.

Let's look at the two best candidates from the original rules (ES and RTY) after applying this new entry rule.

ES With RSI(4)

We can see we did generate more trades. We've gone from 26 to 44. Sill not great, but an improvment.

Simple Shorting Strategy Equity Curve ES RSI

Simple Shorting Strategy Equity Curve ES RSI Entry

RTY With RSI(4)

Yes, we've added more trades here as well. We've gone from 31 to 50. We've lost our beautiful-looking equity curve, but we have more trades, and we're still making new equity highs going into 2022.

Simple Shorting Strategy Equity Curve RTY RSI

Simple Shorting Strategy Equity Curve RTY RSI Entry

Simple Shorting Strategy With RSI(4) Entry



Total Net Profit



Profit Factor



Total No Of Trades






Avg.Trade Net Profit



Max Drawdown (intraday)




Can we make money shorting the market? Yes, but the results are not overly impressive with this strategy. It's great we found a simple technique to increase the number of trades, but it might be best to sidestep that bear market and find other opportunities elsewhere. 

You might be wondering, is this system tradable with real money? Not yet! I think this has potential but remember, there are no stops. With a bit of work on your part, you could trade something very similar to what's presented here.

Jeff Swanson

About the author

Jeff has built and traded automated trading systems for the futures markets since 2008. He is the creator of the online courses System Development Master Class and Alpha Compass. Jeff is also the founder of EasyLanguage Mastery - a website and mission to empower the EasyLanguage trader with the proper knowledge and tools to become a profitable trader.

  • Hi Jeff,

    Aren’t you being a little dismissive of the performance of this strategy? I think the results here look very good. Where the issue arises is with the infrequency of trading (Van Tharp uses a portmanteau word ‘expectatunity’ to combine expectancy with the opportunity to exercise it). But if I recall correctly Connors is quite explicit about the need to trade the strategies he describes across a portfolio of ETFs, thereby increasing the number of trades and, hopefully, the return.

    An article in which you use the ETF portfolio testing software from the Ivy Portfolio piece to test Connor’s ideas across a group of markets would be very welcome indeed.



    • Hello BlueHorseshoe. I have not been spending much time at Trader’s Laboratory lately. Hope all is well with you. I think you may be right. I would like to perform more portfolio testing on this strategy as well as other strategies I write about. The ETF Replay site will not work with this Shorting Strategy as the ability to program is very limited. You basically have a few pre-built methods to backtest. However, TradeStation does have this ability. It’s a relatively new feature and I just need to dedicate some time to learn it. But I think it will be well worth it.

  • Good work but equity curves with the trade number on the X-axis can be quite misleading as they do not reveal prolonged period of inactivity and identify those periods. It would be better to show the actual dates on the X-axis. For example in a 10 year period, all trades could be in the first year and nothing after that, just to mention an extreme case. Are you willing to trade the system no matter how good the results are?

    • This is a good point and one that I’ve brought up in other articles. When evaluating a trading system you need to be comfortable with the drawdown or sideways periods. The time between equity peaks needs to be examined. For some systems this time may be weeks, months or years! That’s why it’s important that everyone download the strategy, test it, completely understand it, and make their own decisions. For what is acceptable to one person, is unacceptable to another.

  • I wonder if there isn’t more work to be done in order to further decrease the possibility these results aren’t due to chance. The simple shorting strategy used four consecutive up closes, which is arbitrary. Shouldn’t you look at surrounding values like 2 (?), 3, 5, and 7? I would also think you should optimize the 200-day MA to check the surrounding neighborhood along with the length of the MA used to cover. The real complexity in my mind, then, comes in making sense of all three optimizations and figuring out which values are best (if any). This is the same sort of process you did in the Double 7’s article by varying the 7-day lookback.

    • Mark, there is always more work to be done! LOL. These are good ideas and would be appropriate for another article. Overall I have to balance the size of the article with the information I wish to convey. I try to keep articles around 1000 words since many people are busy. I wish to convey a single key idea per article so it can be quickly digested. Many of these articles are great springboards to inspire individuals to continue the research on their own. Again, you’re ideas are worth testing and I can easily dedicate another article to test these. Thanks!

  • Hi Jeff,
    In the calculation below, what does Big_Point_Value refer to? How do I get this value?

    Shares = $2,000 per trade / 5 * ATR(20) * Big_Point_Value )

    Thank you

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