Introduction
What are bear markets ? The financial markets follow a pattern. To make smarter financial selections, it’s critical to grasp the differences between these patterns. Why is that? Different market trends, on the other hand, can result in drastically disparate market circumstances. How can you adjust to changing situations if you don’t know what the underlying trend is?
The overall direction of the market is referred to as a market trend. Prices are frequently dropping in a bear market. Bear markets, especially for newcomers, can be difficult to trade or invest in.
Bitcoin has been in a macro bull trend for the most of its history, according to most crypto traders and technical analysts. Despite this, there have been a number of persistent bitcoin downturn markets. These typically result in a price drop of more than 80% for Bitcoin, with altcoins falling by more than 90%. What can you do in these situations?
We’ll talk about what a bear market is, how to prepare for one, and how to profit from one in this article.
What is the definition of a bear market?
A bear market is a time in which the price of a financial instrument falls. For inexperienced traders, bear markets can be exceedingly hazardous and difficult to trade. They can quickly result in significant losses, scaring investors away from ever returning to the financial markets. Why is that?
“Stairs up, elevators down,” as the adage goes among dealers. This means that upward moves are likely to be calm and steady, whereas downward moves are likely to be more abrupt and severe. What is the reason for this? Many traders hurry to abandon the markets when the price starts to fall. They do this either to stay in cash or to lock in profits from long holdings. This can easily spiral out of control, with sellers rushing to the exit leading to other sellers quitting their holdings, and so on. If the market is highly leveraged, the collapse can be increased much more. The cascading effect of mass liquidations will be considerably more pronounced, resulting in a severe sell-off.
Bull markets, on the other hand, can experience euphoria at times. Prices are rising at an accelerated rate, correlations are higher than usual, and the bulk of assets are rising in lockstep.
In a bear market, investors are typically “bearish,” meaning they expect prices to fall. As a result, market sentiment is often negative. However, this does not always imply that all market players are actively shorting. This simply indicates that they anticipate lower pricing and may want to position themselves properly if the time arises.
Examples of bear markets
Many investors believe that Bitcoin has been in a macro bull trend since it began trading, as we’ve explained.
The range of the previous bear market bottom around $3,000 has been retested but never broken as of July 2020. If that level had been broken, a stronger case could be made that Bitcoin is still in the midst of a multi-year bear market.
Because that level hasn’t been broken, it’s possible to argue that the crash in response to COVID-19 worries was just a testing of the range. When it comes to technical analysis, however, there are no guarantees, only probabilities.
The stock market is another noteworthy example of a bear market. The Great Depression, the 2008 Financial Crisis, and the stock market meltdown in 2020 as a result of the coronavirus pandemic are all notable examples. All of these events have wreaked havoc on Wall Street and influenced stock prices across the board. During times like these, market indexes like the Nasdaq 100, Dow Jones Industrial Average (DJIA), and S&P 500 might see large price drops.
What is the difference between a bear market and a bull market?
The distinction is simple to understand. Prices rise in a bull market, whereas prices decrease in a bear market.
Bear markets, for example, can have protracted periods of consolidation, i.e. price activity that is sideways or range. These are periods when market volatility is minimal and there isn’t a lot of trading going on. While the same can be said for bull markets, bear markets are more prone to this type of behaviour. After all, most investors aren’t interested in seeing prices fall over an extended period of time.
Another factor to evaluate is whether or not a short position on an asset is possible in the first place. Traders can only convey a pessimistic perspective on the market by selling for cash or stablecoins if they can’t short an asset on margin or via derivatives. This might result in a longer, drawn-out downturn with little purchasing activity, resulting in a slow and uninteresting price movement.
In a bear market, how do you trade?
Staying in cash is one of the most basic methods traders may employ in a bad market (or stablecoins). If you’re not comfortable with prices falling, you might want to wait until the market exits bear market area. If a fresh bull market is expected to emerge at some point in the future, you can take advantage of it when it happens. A bear market, on the other hand, isn’t always a direct warning to sell if you’re long-term HODLing with an investing time horizon of years or decades.
When it comes to trading and investing, it’s generally a better idea to trade in the market’s direction. As a result, opening short bets could be a profitable strategy in bad markets. Traders can profit from asset price declines in this fashion. These can be day trades, swing trades, or position trades, with the main goal being to trade in the trend’s direction. As a result, many contrarian traders will hunt for “counter-trend” transactions, or bets that are against the dominant trend’s direction. Let’s have a look at how that goes.
This would be entering a long position on a bounce in the case of a bear market. A “bear market rally” or a “dead cat bounce” is a term used to describe this type of move. Many traders may pounce on the opportunity to long a short-term bounce, making these counter-trend price surges extremely risky. The idea is that the downtrend would restart straight after the rally until the overall bad market is confirmed to be finished.
This is why, before the bear trend resumes, successful traders will take profits (around recent highs) and exit. Otherwise, they may find themselves trapped in their long position if the bear market persists. As a result, it’s critical to recognise that this is a high-risk technique. Even the most experienced traders might lose a lot of money trying to grab a falling knife.
Conclusions
We’ve gone through what a bear market is, how traders may protect themselves from them, and how they can profit from them. In conclusion, in a bear market, the most easy technique is to stay in cash and wait for a safer time to trade. Many traders, on the other hand, will hunt for opportunities to build short positions. When it comes to trading, we all know that following the market trend is a good idea.
