Don't Confuse a Bull Market With Skill

In a rising market, buying more or less anything and holding it for a while makes money. That includes buying it for poor reasons, with no stop, at the wrong size. The market pays for all of it, and the trader who did it concludes, reasonably enough, that the method works.

The conclusion is not wrong, exactly. It is untested.

Tide and swimmer

Most of a long position’s return in a bull year is the market’s return. Whatever you added or subtracted with your entries and exits is a smaller number sitting on top of a large one, and the large one is not yours.

There is a quick way to see this. Take your trading return for the year and subtract what an index fund would have made over the same period with the same average exposure. What is left is the part your decisions contributed. For many traders in a good year that figure is modest, and for a fair number it is negative: they made money and still did worse than doing nothing would have.

What each regime reveals

A trending bull market rewards holding, punishes tight stops and forgives poor entries. It hides sizing errors because the drawdowns never arrive to expose them.

A range-bound market rewards fading extremes, punishes breakout buying and exposes anyone whose method lacks a rule for “no trend.” This is where trend followers hand back a bull year’s gains one small loss at a time.

A bear market punishes everything long, exposes correlation you did not know you were carrying, and reveals whether your stops and sizing were real or decorative. Traders who survive one generally emerge with a different opinion of their own skill and a much better risk process.

It follows that a strategy has not really been tested until it has been run in a market that does not help it. For a long-biased method, that means a sideways year, where entries are stopped out by chop, and a falling one, where the tide is against every position.

An illustration

Picture a first full year of trading that happens to coincide with a strong market. The results are excellent and the trader is confident they are his. The following year is sideways, the method is almost entirely trend continuation, and it produces a long run of small stop-outs. The expectancy that looked so solid turns negative for the better part of eight months.

Looking back, the arithmetic is uncomfortable. The first year’s return, less the index return over the same period and adjusted for how much was invested, comes to a modest positive number rather than the triumph it felt like. The second year, in a market that offered the method nothing, shows what the method was worth on its own.

Finding out what is yours

1. Benchmark every year against the index over the same period, scaled to your average exposure. That gap is your contribution; the remainder is tide.
2. Backtest across regimes on purpose. Pull a sideways stretch and a falling one and run the rules on those before trusting a result from a rising one. The backtesting guide treats regime dependence as one of the five biases.
3. Track win rate and expectancy by market condition in the journal. If everything good happened while the index was above its 200-day average, what you have may be a filter rather than an edge, and you need to know which.
4. Write the “no trend” rule now, while the market is kind. The time to decide what you do in chop is not during it.

None of this means a bull-market return is not real money. It means the confidence it buys should be discounted accordingly, and the size adjusted accordingly when the weather changes.