Trading Toolkits: Bear Markets Explained

No matter how much investors or traders loath the idea of a bear market, the market is significant and critically essential as it brings sanity to the market. The Bear market presents an incredible opportunity to stack your bags.

By
Wilfred Victor
on
March 28, 2021
Category:
Trading Toolkits

Introduction

No trend lasts forever is a fact many successful traders have come to appreciate if they want to stay profitable in the market for a long time. Market cycles change on a dime. Whether the bull or the bear period, successful traders are considered the most flexible business people because of their ability to change with the trends. Although the bear market trend may not be attractive for most traders, it presents unique opportunities for experienced players. 


What is a Bear Market?

A bear market is a period where there is a continuous decline of the market’s asset price. The price decline and the general market sentiments, buyers’ low interest, and shorters(hedge funds and scalpers) become more dominant. The period is characterized by a 20% decline of assets from their high in a sustained period of more than two months amidst widespread pessimism and negative investors/traders sentiments.

Until these conditions are satisfied, the market is still very much in its Bull trend; a 10% decline is considered a correction of the market and can present buying opportunities.


What is a Correction?

The trends are never a straight path, especially for a Bull rage market. When you zoom out of the chart of top cryptocurrency Bitcoin, you could find that on a macro level, it’s been on a bull run for years almost since its first creation.

Despite its entry into the current Bull run, which started late last year, it’s normal to expect a few pullbacks now and then as the trend is never a straight path. A Correction is when an asset’s price has fallen only 10% or less and in less than two months like currently witnessed in the crypto market.

Bitcoin on the monthly chart


How do Investors/Traders Trade the Bear market?

In a real sense, experience players do not care too much about the trends; they profit despite the market’s direction. Each market trend has particular players that make some impressive amount of money because of their role. 

In a Bear trend market, the general sentiment is low, selling pressure is high as their little trading actions compared to the overtly positive and hype mode of investors during the bull market. This market is in contrast to the Bull market. The players that thrive the most in this market trend are the Hedge Fund, Hedgers, Shorters, Scalpers, and Day traders.

The Hedge and Hedge fund players’ job is to short the market; because of the overall negative sentiments, the price of assets is expected to decline. Hedgers take their short position and profit on the decline. 

Shorters/Scalpers/Day traders take advantage of the volatility on the lower timeframe. Despite the declining trend, there will be periods where the market will have to correct back up a little or have volatility due to one event or another. Generally, these players may act as shorters too, but they profit fast price movements and do not stay in the market for long.

However, the Bear run’s general strategy is that most traders would prefer staying in stablecoins or fiat for the rest of the period. To remain in liquid, especially for inexperienced traders who do not have the skill to navigate a Bear trend.


Why is the Bear market Significant?

No matter how much investors or traders loath the idea of a bear market, the market is significant and critically essential as it brings sanity to the market. Without the Bear markets period of pullbacks, overtly hyped asset price correction would be rampant. The bear trend makes all of the sentiments for future growth possible and can act as a period where experienced and intelligent players accumulate assets.

The Bear market presents an incredible opportunity to stack your bags as Tweeted by this Twitter user and Bitcoin trader.


Phases of a Bear Market

  • The first phase comes with increased buying pressure and a high price of assets. Towards the end of this phase, investors start to drop out of the markets and take in profit.
  • In the second phase price of assets starts to drop significantly up to 20%, trading activities and investors’ sentiments dive down. And economic indicators that were once positive begin to go below the average. Investors start to panic due to these sudden crashes and negative sentiments; this phase is referred to as the capitulation phase.
  • Speculators start to enter the third phase and begin to raise the price of assets and consequently increase the volatility.
  • The price of assets continues to drop but slowly in the fourth and last phase. The price drop can go on for two months or more until a renewed positive sentiment can turn the market’s tide and bring in the bull season again.


The Difference Between Bull and Bear Trends

There are simple indicators to identify the differences between the trends;

  • Increased buying pressure in a Bull market as a contrast to a Bear market
  • Positive sentiments in a Bull in contrast to a Bear trend
  • Prices are going up in a Bull but decline for a considerably long time in the Bear cycle.

Another significant indicator in the Bear market is the long periods of consolidation, i.e., sideways or ranging price actions due to its low volatility.


In Conclusion

A Bear or a Correction concept should not be confused as the parameters are not cast in stones; both numbers and durations are arbitral but are generally accepted and widespread. It is advised that traders do not trade against the trend and are always flexible to change.

It’s best to stay out of trades and hold stablecoins or Fiat to avoid catching a falling knife, an activity in the trading system which involves trading against the trend like going long(buying) in a bear market. 

Staying away from the market is also a trading strategy, as experienced traders do not always trade. Adhere to the sound economic principle of trading and proper risk management, and you will move an average trader to a proficient successful one in a relatively short period.

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Wilfred Victor

Ace finds himself as a blockchain enthusiast who is focused on growing with the entire crypto sector. He is an energetic and passionate writer who believes that all things are achievable.