Introduction
The stock market follows a cyclical pattern, and knowing what a bear market is can help you make better investment decisions. Market conditions shift dramatically based on prevailing trends, making it essential to identify bull and bear markets. Learn how to navigate market fluctuations and invest wisely.
The most important trend in the economy is the trend in the market. Price drops are an indicator of a bear market. Bear markets can be especially challenging for new traders and investors.
Most crypto traders and technical analysts agree that Bitcoin has been in a long-term bull market. However, the cryptocurrency market has seen several prolonged bear trends. During these, Bitcoin’s price typically drops by more than 80%, while alternative cryptocurrencies frequently lose value by more than 90%. Exactly what can you do now?
This article will explain what a bear market is, how to prepare for one, and how you might even be able to make money during one.
If you want to learn more about bull markets, read What Is A Bull Market?
What is a Bear Market?
A bear market is a period of falling financial market prices. Trading in a bear market can be difficult and dangerous for those without prior experience. They frequently result in severe losses and discourage people from re-entering the financial markets. What’s the deal?
“Stairs up, elevators down,” as financial professionals say. Movements upwards may be gradual and steady, whereas movements downwards are likely to be abrupt and erratic. What’s the deal? When market prices begin to fall, many investors rush to exit. They do this to maintain a cash balance or to secure profits from long positions. When one group of sellers cashes out, it can set off a chain reaction of other sellers following suit, and so on. If the market is highly leveraged, the fall could be even more dramatic. The domino effect of widespread liquidations will result in a chaotic, violent sell-off.
However, euphoria can occur in bull markets as well. Most assets are rising in value at the same time, and prices are rising at an abnormally fast rate.
Bear markets are characterized by “bearish” sentiment, or the expectation that prices will fall. As a result, market sentiment is quite negative. Nonetheless, this does not necessarily imply that everyone in the market is actively in a short position. This simply means that they anticipate a drop in prices and may seek to position themselves accordingly if the opportunity arises.
Examples of Bear Markets
As previously stated, many traders and investors believe that Bitcoin has been on a long-term upward trend since its inception. Does this imply that there are no bear markets within the scope of the current uptrend? No. Bitcoin has experienced a severe bear market since its December 2017 surge to around $20,000 per coin.
The 2017 Bitcoin bull market ended with a price crash.
Bitcoin fell 86% in 2014, well before the 2018 bear market.
The current Bitcoin price is 86% lower than its 2013 high.
Prices had yet to fall below $3,000, the previous bear market low, in July 2020. Breaking through that low would lend credence to the notion that Bitcoin is still in the midst of a multi-year bear market.
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Bitcoin prices have returned to the area surrounding their previous bear market low.
A retest of the range is consistent with the fall following COVID-19 fears, not constituting a true break of the level. However, in technical analysis, there are no guarantees, only probabilities.
Bear markets are also well-known in the stock market. Notable examples include the Great Depression, the 2008 Financial Crisis, and the predicted crash of the 2020 stock market due to a global coronavirus pandemic. All of these factors have had a significant negative impact on Wall Street and the value of stocks in general. During such times, the Nasdaq 100, Dow Jones Industrial Average (DJIA), and S&P 500 index are all vulnerable to sharp drops in value.
What Distinguishes a Bear Market From a Bull Market?
There is a clear difference between the two. In a bull market, prices go up, while in a bear market, they go down.
Consolidation, or sideways or ranging price action, may be more common in bear markets than in bull markets. During these times, the market is relatively quiet, and volatility is low. While this can occur during bull markets, it is more common during downturns. After all, most investors would rather not bet their money on a prolonged price decline.
Another consideration is whether or not you can short an asset. If investors cannot short an asset on margin or through derivatives, bearish traders will have to settle their positions in cash or stablecoins. As a result, there may be a lack of buying interest, and the price may remain sideways for an extended period of time.
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Trading Strategies for a Bear Market
Staying in cash (or stablecoins) during a bear market is one of the most basic strategies traders can employ. If you are concerned about price declines, you may want to wait until the market exits bear market territory before investing. Assuming that a new bull market will emerge at some point in the future, you can profit if and when it does. If you’re a long-term HODLer with a decades-long investment horizon, a bear market isn’t always a clear indication that you should sell.
When possible, invest or trade in the direction of an upward or downward market trend. Taking short positions may thus be a useful strategy for making money during market downturns. This method can help traders make money by reducing asset prices. Day trading, swing trading, and position trading are all viable strategies, with the overarching goal of trading with the trend. As a result, many contrarian traders seek “counter-trend” trades or trades that go against the main trend. We should put it to the test.
In a bear market, the long position would be to purchase the rebound. This is known as a “dead cat bounce” or “bear market rally.” Price fluctuations during these counter-trend periods are frequently volatile, as many market participants chase after the potential gains of a temporary upswing. However, until the end of the bear market as a whole is confirmed, the downtrend is expected to resume immediately after the bounce.
As a result, investors will cash out their gains (near recent highs) and flee before the bear trend resumes. A long-position bear market could trap them in their long position. Be aware that this is a highly risky strategy. Attempts to catch a falling knife can result in significant losses for even the most experienced traders.
In Conclusion
We discussed what a bear market is and how traders can profit from it. In conclusion, keeping a cash balance and waiting for a more favourable trading environment is the simplest strategy to take during a bear market. In contrast, many market participants seek out short-position opportunities. When trading, it is common sense to move in the same direction as the market.