Hunting for profits in a bear market as a trader

Bear Market | Take Advantage of the Market to Make Profit
A bear market is a financial market that is characterized by falling prices. It is the opposite of a bull market, meaning that stocks are generally on the rise. Despite the economic pessimism that surrounds a down-leaning market, due to the fact it usually coincides with a larger economic downturn, it certainly does not mean it lacks opportunities to trade for profit. Indeed, history is littered with examples of savvy traders making huge profits during economic downturns and stock market crashes.

A bear market gets its name based on the metaphor: during the attack, a bear moves its paws downward to immobilize its prey. That’s why when prices in the financial market are going down, investors associate it with this animal. In contrast, a bull thrust its horn up to catch its prey.

When prices of securities fall by more than 20 percent, that brings a negative investment notion. An economic decline, low employment, business profits drop, political intervention into businesses – all these factors may cause a market to become “bearish”.

How to trade in a bearish trend

If financial markets are trending downwards, there are many options for traders to obtain potential profits. Consider the following popular strategies for trading during a downturn:

1. Go short – There are several trading options, including CFDs (Contract for Difference), that can allow you to profit from falling stock prices.

2. Day trading – Volatility is a common characteristic of a bear market, and that can make it an opportunity for day traders.

3. Diversify your trades – Not all industries and commodities will trend downward in a down market, and some can even thrive.

4. Explore commodities – While it’s never guaranteed, buying gold and other commodities has often been a sound investment during major stock market crashes over the last several decades.

The important factors you must know about the bearish market

Many traders have been almost conditioned to think that a downward falling market is a negative thing. To be fair, it usually coincides with general economic problems, nationally and globally, which could explain why so often people equate downturns in the market as a bad thing.

While there is an equal opportunity that you could reach the same level of profitability with your trades in a bearish trend as you can in a bull market. Indeed, the same rules apply no matter the market type in the sense that you should exercise discipline, be patient and be wary of the risks of investing funds. Nevertheless, profit can be made in all types of markets if handled sagaciously.

Despite all the opportunities that a negative trend offers, the chance of significant losses is very high. Prices may continuously lose their value without any known date for it to stop. The unpredictable nature of those prices may not work out for traders who hope for price rise one day. That’s why it is advisable to trade with an additional strategy along with short selling. For instance, set a short-term investment tactic or use hedging techniques. 

Trading Strategies in the bearish trend

A normal bearish trend would depend on the underlying trade idea. The idea will incorporate the price and target asset that a short trade will take place. S&P is a popular market trader that likes to go short on in an index market since it represents other underlying stocks. However, for other traders, they prefer to trade the underlying stocks itself. For instance, ETF tracks a basket of bonds, securities, commodity, and stock market index.

Today, traders may find it a better option to trade ETF since they have lower fees compared to mutual funds and have more liquidity in the market. Another decision when trading a bear market to consider is the trading vehicle you will use. Are you going to use options, futures, or contracts for difference (CFD)? This decision will influence your trading strategy in the long run.

A CFD allows traders to speculate the price of an asset during a bear market. If that is not clear, you can envision CFD as an agreement between you – the trader and the CFD provider to pay one another the difference between the opening price and closing price of an asset or financial instrument. With this, you don’t have to own that asset, but the CFD allows you to gain exposure with that asset. CFDs are leveraged instruments, which mean that with your little investment, you can hold larger positions.

Another trading strategy to employ in a bearish market is trading options. With put options, you can sell the stock at a predetermined price before a specific date while hedging it against falling prices. However, in a call option, you can anticipate that the price will rise; here, you can buy the stock at a low price when selling it for a higher price. Today, options are available in most platforms to help traders trade the bear market.

5 tips for trading in a bearish market

Now you understand that a downward movement of price characterizes the bearish market. Alternatively, it is a market whose value declines more than 20% with its opposite being the bull market where the price experiences an increase in value. Nevertheless, most beginners prefer to trade a bull market because the pressure of a bear market is intense. Therefore, the only strategy for these traders is to avoid the bearish market and find opportunities in a bullish market.

Irrespective of what type of market – bear and bull, you can navigate your way through it and survive. Here, you will learn important survival tips when trading a bearish market. Importantly, how you apply these tips will determine the kind of results you get from your trading.

1. Spread Your Investments

Diversifying your investments is one important decision you will need to consider if you haven’t done that. In trading a bearish market, it maybe the best strategy to employ instead of focusing on one or two financial assets. In case, if you will trade through CFDs, you may do that by investing in other currency pairs.

Furthermore, another way of diversifying your investment is by hedging your trades by countering one another to minimize your loss. Additionally, you can add other financial instruments such as stock to your portfolio.

2. Buy low and sell high

It is likely that you may have heard this line several times before. However, if you miss it, then you need to go back to the basics because it is the foundation of trading. In trading, the goal is to buy at a low price and sell at a high price. It is the best strategy if you want to increase your capital when trading.

Nevertheless, it can be a risky strategy, especially when you decide to buy low, and the market continues to dip further. With such scenario appearing, it is wise to use various tools to confirm the trade if it will rise before going low. Additionally, your risk-management plan is important here as it can minimize your risk incurred when the market goes against you.

3. Trade the right currency

Now you are convinced of buying low and selling high; however, investing in the right CFD on currency pair will help you actualize that strategy. You need to identify the right currency pairs worth trading with your capital. At first, it might seem not easy, but as you continue, you can take away any pair that isn’t giving you what you want to be part of your forex trading strategies.

Subsequently, you can invest in a currency pair that you know has a high tendency of recovering and allows you to sell it at a reasonable price.

4. Trade using larger Timeframes

Generally, in a bear and bull market, trading on higher timeframes generates better results. When trading in a bearish market, a higher timeframe is the best option since you have a bigger picture of the market. However, a short-term timeframe doesn’t put a lot of factors into consideration, and this might affect your overall trading.

5. Focus on price action

There are a lot of opportunities in a negative trend, but most traders squander this opportunity by focusing on value instead of price action. It is hard to value a stock, especially when you have no idea a particular economy will remain shut down. During this period of a pandemic, it is advisable to focus on price action instead of the value.

Protecting Yourself in a Bearish Market

Risk management is an essential strategy; all traders must set up to minimize their loss in the market. In a bullish market, it is not a major problem because you can recoup your loses. However, in a bearish market, it is more difficult to deal with.

Given this, using a stop-loss order can help mitigate your capital. Although a bearish market doesn’t decline continuously, the price must retrace from time to time. That means you may be stopped from a market position once the price reaches your stop-loss order. However, it safeguards your capital while minimizing the effect from a dropdown.

Is a bearish market a recession?

For beginners, it can be quite confusing, but a bearish trend is not a recession but can lead to recession since they go hand in hand. Nevertheless, different issues contribute to both situations.

A recession is usually a situation where there is a slowdown in economic activities or output. The dip in the gross domestic product of a country for at least two successive quarters is called recession. However, a bearish market is a situation where the stock market experience declines because of negative sentiment from investors.

What contributes to a bearish trend?

Leading to bearish trend could be a work of multiple things. However, it is essentially the crisis of confidence of an investor in a market. The major factors that trigger a bearish market are a slowing or weak economy. Another factor is the expectation of an economic slowdown. The following signs indicate a slowing economy:

  • Declining corporate profits
  • Increasing unemployment level
  • Low consumer confidence
  • Low disposable income
  • Falling productivity

How long does a bearish market last?

Averagely, a bearish market can last for 14.5 months while taking over two years to recover from such dip. Since 1990, we have only experienced two bearish trends that last over two years. In as much as the volatility in a bearish market is severe in comparison to a bull market, it does come to an end. This gives rise to the next bullish market that would continue pending when price movement changes direction.

Trading in all kinds of markets

Trading via CFDs can be a great way to make the most of the falling markets. By shorting your investments, you can take advantage of falling markets, and being able to short sell is one of the advantages of trading CFDs.

Of course, rising markets present trading opportunities as well, and with CFDs, you can choose to go long if you believe your asset will increase in price, even if the market as a whole is dropping.

CFDs, contracts for difference, are a unique method of trading, with advantages including being able to go long or short and trading with leverage. CFDs become profitable when your speculation comes in. You choose an asset, speculate on the direction your asset will go (rise or fall), and if you are correct, you gain.

While it is equally important to understand, there are risk factors attached as well. The risk comes when your imagined levels/price is not reached. As you may suffer losses, if you speculate incorrectly for the direction your asset will go. Hence, it is must to be fully prepared for all possibility before going ahead with your trade.

You can trade a wide selection of popular assets at R1Investing using CFDs. Many of the assets offered at R1Investing are household names including stock CFDs on Coke, AIG, Boeing, Apple, and Nike; CFDs on cryptocurrencies such as Ether, Ripple, Dash and Bitcoin; commodity CFDs such as gold, coffee, silver, and cotton; Indices CFDs including Nikkei 225, FTSE 100 and AEX 100, and forex pairs including pairings created with USD, EUR, CAD, JPY, and GBP as well as many more currencies.

You can trade at R1Investing without high commissions or trading fees, so you can use your funds where it matters most: on the CFDs, you believe will go in your direction, whether you are trading on a bear market or a bullish one. Discover all R1Investing has on offer, by clicking the “open account” button below.

The information provided is for educational purposes only and should not be considered investment advice.

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Written by:
Omer Aragón Godínez

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