A bear market could be one of the worst things for long-term holders of assets. Unfortunately, bear markets are very common in every single aspect of life and in the financial sector. After a strong bull market, there comes a bear trend.
This article will go through the bear market definition, how it works and how to spot one. At the same time, we will share some details on how to trade a bear market and which are the things you should take into consideration when spotting one.
Disclaimer: the information shared by AltSignals and its writers should not be considered financial advice. This is for educational purposes only. We are not responsible for any investment decision you make after reading this post. Never invest more than what you are able to lose. Always contact your professional. financial advisor.
What is a Bear Market?
A bear market is a term given to negative trends in financial markets. It takes place when the price of a specific asset or the whole market moves downwards for long periods of time. In this way, traders have a more complicated task if they want to make money.
There is no clear percentage amount or period of time that would allow us to clearly define a bear market. However, there are other characteristics that we could take into account if we want to know if we are trading in a bear market.
The bear market meaning is very negative for traders. Indeed, it becomes very difficult for investors to trade bear markets. It requires a lot of time, patience and analysis. Thus, compared to a bull market it is simply a more complicated task to make money.
Indeed, it is not possible to purchase an asset and keep it for the long term waiting for the market to bring you profits. In a bear market, you would lose money if you don’t actively trade (unless you open a short position).
Finally, during bear markets, not all the assets will fall. Some of them would move higher. Nevertheless, the majority of the assets would move downwards.
Bear Market Characteristics
There are several characteristics of bear markets that we should pay close attention to. These things will help us understand whether we are in a bear market or not. Some of the main features of a bear market include:
- Lower highs
- Lower lows
- Lower volumes
- Bull traps
The first thing we need to take into consideration is related to the trend. During bear markets, we will see that the price of an asset would follow a pattern in which it will register lower highs and lower lows.
In this way, the asset we are following would show a clear downward trend where bull traps would not surpass previous bull traps. Let’s give an example. Stock A moves from 20 to 10 and then it moves from 10 to 12. As we are in a bear market, the trend will continue from 12 to 5 and then a retracement to 7.
In this example, we see that the second bull trap is similar in magnitude to the first one. However, it is not large enough to break the downward trend. If the second bull trap would have pushed the price of asset A above 12, then this could be a red flag for the bear trend.
Understanding where and how to buy during bear markets is certainly important.
How to Trade Bear Markets?
Now that we know most of the characteristics of bear markets, we need to know how to trade them. We have a full guide on how to trade bull markets that could also be applied to bear trends.
The first thing we need to know is that during bear markets there will be bull traps. These bull traps could be very helpful for users that couldn’t sell at the top of the market. Before another move lower, these bull traps could help many traders sell at a profit.
You should always have a clear strategy when trading bear markets. One of the things you can do is to open a short position. In the cryptocurrency market, it might be somehow risky to trade with leverage considering that there is large volatility in the crypto market.
It is also important to trade without emotions and always having a clear strategy during bear markets. Avoiding entering a bull trap and properly using them in case you were not able to sell on time are key points of trading a bear market.
