What Is a Bear Market? / Bear market examples / How to trade in a bear market
What Is a Bear Market?: A bear is an investor who expects prices to decline and, on this assumption, sells a borrowed security or commodity in the hope of buying it back later at a lower price, a speculative transaction called selling short.
A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Bear markets also may accompany general economic downturns such as a recession.
While bull markets are fueled by optimism, bear markets — which occur when stock prices fall 20% or more for a sustained period of time — are just the opposite. The first and most famous bear market was The Great Depression. The dot com bubble in 2000 and the housing crisis of 2007–2008 are other examples.
The words “bear market” strike fear into the hearts of many investors. But these deep market downturns are unavoidable, and often relatively short, especially compared with the duration of bull markets, when the market is rising in value. Bear markets can even provide good investment opportunities.
What Is a Bear Market?
It is a general decline in the stock market over a period of time. It includes a transition from high investor optimism to widespread investor fear and pessimism. One generally accepted measure of a bear market is a price decline of 20% or more over at least a two-month period.
A smaller decline of 10 to 20% is consider a correction.
Bear markets end when stocks recover, attaining new highs. The bear market, then, is measure retrospectively from the recent highs to the lowest closing price, and its recovery period is the lowest closing price to new highs. Another commonly accepted end to a bear market is indices gaining 20% from their low. From 1926 to 2014, the average bear market lasted 13 months with an average cumulative loss of 30%, while annualized declines for bear markets ranged from −19.7% to −47%.
Introduction Bear market
Financial markets move in trends. It’s important to understand the differences between these trends to be able to make better investment decisions. How come? Well, different market trends can lead to wildly different market conditions. If you don’t know what the underlying trend is, how are you going to adapt to changing conditions?
A market trend is an overall direction that the market is going. In a bear market, prices are generally declining. Bear markets can be a challenging time to trade or invest in, especially for beginners.
Most crypto traders and technical analysts agree that Bitcoin has been in a macro bull trend throughout its existence. Even so, there have been several relentless cryptocurrency bear markets. These generally bring more than an 80% decline in the price of Bitcoin, while altcoins can easily experience more than 90% declines. What can you do during these times?
In this article, we’ll discuss what a bear market is, how you should prepare for it, and how you may be able to profit from it.
NOTE: If you’d like to read about Best Popular Candlestick Patterns Used in Technical Analysis, check out What Is A Candlestick?.
More About Bear Market
It can be defined as a length of declining prices in a economic marketplace. endure markets may be extremely volatile and tough to trade for green traders. they can without problems result in great losses and scare traders from ever returning to the financial markets. How come?
There’s this pronouncing among buyers: “Stairs up, elevators down.” this means that moves to the upside may be slow and constant, whilst movements to the drawback tend to be extra sharp and violent. Why is that? when the fee starts offevolved crashing, many buyers rush to go out the markets. They do that to both live in coins or lock-in income from their lengthy positions. this will speedy result in a domino impact where sellers dashing to the go out leads to even extra sellers exiting their positions, and so forth. The drop can be amplified even extra if the marketplace is exceptionally leveraged. Mass liquidations could have an excellent extra stated cascading impact, resulting in a violent sell-off.
With that said, bull markets can also have phases of euphoria. During these times, prices are increasing at an extreme rate, correlations are higher than usual, and a majority of assets are going up in tandem.
Typically, investors are “bearish” in a bear market, meaning that they expect prices to decline. This also means that market sentiment is generally quite low. However, this may not mean that all market participants are inactive short positions. This just means that they expect prices to decline and maybe look to position themselves accordingly if the opportunity presents itself.
Bear market examples
As we’ve discussed, many investors think that Bitcoin has been in a macro bull trend since it started trading. Does that mean there aren’t bear markets contain in that bull run? No. After Bitcoin’s move to around $20,000 in December 2017, it’s had quite a brutal bear market.
- Bitcoin price crashes after the 2017 bull market: And before the 2018 bear market, Bitcoin experienced an 86% drop in 2014.
- Bitcoin price crashes 86% from the 2013 top: As of July 2020, the range of the previous bear market low around $3,000 has been retested but never broken. If that low would have been breached, a stronger argument could be made that a multi-year Bitcoin bear market is still underway.
- Bitcoin retesting the range of its previous bear market low: Since that level has not been broken, the argument can be made that the crash following COVID-19 fears was merely a retest of the range. Still, there are no certainties when it comes to technical analysis, only probabilities.
How to trade in a bear market
One of the simplest strategies traders can use in a bear market is to stay in cash (or stablecoins). If you’re not comfortable with prices declining, it may be better to simply wait until the market gets out of bear market territory. If there’s an expectation that a new bull market may come at some point in the future, you can take advantage of it when it does. At the same time, if you’re long-term HODLing with an investment time horizon of many years or decades, a bear market isn’t necessarily a direct signal to sell.
When it comes to trading and investing, it’s generally a better idea to trade with the direction of the market trend. This is why another lucrative strategy in bear markets could be to open short positions. This way, when asset prices are going down, traders can profit off the decline. These can be day trades, swing trades, position trades – the main intention is simply to trade in the direction of the trend. With that said, many contrarian traders will look for “counter-trend” trades, meaning trades that are against the direction of the major trend. Let’s see how that works.
In the case of a bear market
In the case of a bear market, this would be entering a long position on a bounce. This move is sometimes called a “bear market rally” or a “dead cat bounce”. These counter-trend price moves can be notoriously volatile, as many traders may jump on the opportunity to long a short-term bounce. However, until the overall bear market is confirm to be over, the assumption is that the downtrend will resume right after the bounce.
This is why successful traders will take profits (around the recent highs) and exit before the bear trend resumes. Otherwise, they could be stuck in their long position while the bear market continues. As such, it’s important to note that this is a highly risky strategy. Even the most advanced traders can incur significant losses when trying to catch a falling knife.
We’ve discussed what a bear market is, how traders may protect themselves and profit off bear markets. In summary, the most straightforward strategy is to stay in cash in a bear market – and wait for a safer opportunity to trade. Alternatively, many traders will look for opportunities to build short positions. As we know, it’s wise to follow the direction of the market trend when it comes to trading.
However, if there is anything you think we are missing. Don’t hesitate to inform us by dropping your advice in the comment section.
Either way, let me know by leaving a comment below!
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