What is a Bearish Market
At any point in time, the financial markets are often described as bearish or bullish. This is mostly evident in the price charts of financial market securities. In a bearish market, prices tend the fall while a bullish market is the exact opposite where the prices are going up. The names originate from the attacking methods of the animals; bear and bull. A bear attacks by clawing down its prey while a bull attacks by thrusting its horn violently in an upward direction.
Table of contents
- What is a bearish market?
- Characteristics of a bearish market
- Contract for Differences
- How to trade a bear market with r1investing.
What is a Bearish market?
A bearish market is a phenomenon where the prices of financial securities continue to decline over a period of time. A bear market is confirmed when the market price has fallen by at least 20% from a recent high. Bear and bull market are terms commonly used to describe the conditions of a financial market such as the stock market, forex, CFDs, commodities, etc. Generally, when the stock markets’ shares are depreciating, it is described as a ‘bear’ market. But, when the stock prices are appreciating, it is referred to as a ‘bull’ market.
Characteristics of a bearish market
The direction of market prices is of great concern to every investor because it determines the size of his portfolio. Generally, a declining market trends are not desired by most investors across the financial markets. This is because of its negative impact on the stock markets, economy and investors’ pockets.
Below are some of the characteristics of bear markets:
Below are some of the characteristics of bear markets:
1. Demand and Supply
When the prices are declining, more investors are willing to sell their securities which create a high supply greater than the demand. Of course, this low demand and excess supply leads to a price drop in tradable assets across the markets. At such times, several investors may sell in order to limit their losses. But forex and CFD traders are unperturbed even though CFDs derive their prices from the underlying markets which may be surging or declining.
2. Weak economy
A weak economy is generally associated with a bear market. When prices decline, especially in the stock market, the economy is adversely affected. The share prices of the big companies drop and most of them look for ways to reduce costs. They resort to staff retrenchment thereby increasing the level of unemployment in the economy. The major stock indices continue to fall and if the trend continues, then, a recession is imminent.
3. Investor Pessimism
Most investors are reluctant to invest in a bear market. In order to curb their losses, investors usually start moving out their money from stocks to fixed income securities. Investor psychology makes a huge impact on the financial markets. When the market sentiment is negative, potential investors withhold their funds and wait for positivity while investors pull out their funds.
Contract for Differences (CFDs)
Contract for differences (CFDs) are a type of investment that enables a trader to predict the price direction of an underlying asset at a given time without ownership claims. It is just contracts between a financial service provider and a trader whereby the trader just speculates on the prices of selected financial instruments such as stocks, forex, commodities, indices, etc. Though complex and very risky, an advantage of CFD trading is that the CFD trader is unaffected by either a bullish or a bearish market. This is because the trader is only forecasting the price direction of the trading instrument and holds no assets.
How to trade a bear market with r1investing:
CFD traders open positions on financial assets to buy or sell through software trading platforms provided by online financial services providers. For every tradable asset, a buying and a selling price is quoted. If a trader predicts a bear market for a particular asset at a given time, he places a ‘sell’ order on the trading platform. But if he believes that prices will go up, he buys the instrument. The trader’s decision is informed from his trading strategies which may include technical analysis or fundamental analysis principles.
Below are the steps to trade a bearish market with r1investing:
- Click on the button ‘open account’.
- Fill the series of forms that displays.
- Make a deposit using any of the payment options available.
- Verify your account by uploading your government issued ID card and a recent utility bill.
At this juncture, you will wait for r1investing to verify and approve your email. If successful, continue as follows:
- Download and install the MT4 trading platform on your windows computer, iPhone or android device. If you wish to use the WebTrader version, click on the provided link to launch the terminal on your web browser.
- Login with the details supplied with your registration.
- On the MT4 home screen; look for the asset you wish to trade on the ‘Market watch’ window. If you are using the mobile app, tap on the ‘quotes’ tab.
- Double-click on the asset to display the ‘order’ window.
- Select the lot size, input ‘stop loss’ and ‘take profit’ prices as desired.
- Click on ‘sell’ to open the trade position since you believe that a bear market is imminent.
- Click ‘close’ when you are ready to terminate the trade and lock-in your profits or losses.
A financial market condition where prices are falling steadily over a given period of time is referred to as a ‘bearish market’. It affects all financial markets including stocks, CFDs, forex, commodities, etc. When prices decline, investors lose their confidence and become pessimistic, stocks decline and unemployment is rife. The overall result is a weak economy. But CFD traders take advantage of both the bear and bull market because they do not buy the real asset, rather they only speculate on the prices of the trading assets.
Below are some of the reasons why you may choose to trade with r1investing:
- Very low and competitive spreads.
- Efficient customer support desk available 24/5.
- Leverage up to 1:500 for professional clients
- Over 350 trading assets
- Comprehensive training resources available.
What is the difference between a bullish and a bearish market?
A bullish market refers to a market condition where prices are soaring higher and the economy is flourishing while a bearish market means that prices are going down depicting a receding economy.
Is a bearish market good or bad?
To the CFD trader, a bearish market presents a good opportunity to sell short on the assets involved. Since traders only speculate on the prices of the traded assets, the CFD trading is unaffected by a bull or a bear market. But, in stock trading, bear markets are generally not desirable though it presents opportunities to buy more shares with the hope that the market will reverse in the near future.
How do bearish investors make money?
In CFD trading, bearish investors open ‘sell’ positions on the trading platforms provided by the financial services provider. Stock market speculators and investors try to make money by selling short.
How do you know if a market is bearish?
From the financial instrument’s chart, trend patterns can be identified. A downward trend with lower highs and lower lows indicates a bear market. It can also be confirmed through the use of technical indicators.
Should you buy in a bear market?
If you are trading CFDs, you only sell in a declining market and buy in a bullish market. In the stock market, a bear market presents a good opportunity to buy shares of different companies at a low price with the hope that the shares will appreciate in future. When this happens, the trader will either sell at a profit or wait to earn dividends when profits are shared to investors.
The information above is for education purposes only and cannot be considered as investment advice