A bear market refers to the market that has plunged 20% from its last high over a period of two months or more. During the time of a bear market, the confidence among investors is significantly lower and concerns over further price drops are increased.
As the prices drop, selling pressure becomes even higher leading to an even sharper price drop as buyers back off. In the image below, you can see a visual representation of the difference between a bull and a bear market.
How to Trade in a Bear Market?
The psychology among traders tends to change in a negative way during a bear market, however, this should not happen as both long and short positions carry the same potential risk. Therefore, traders should attempt to make clear and rational trading decisions in both bull and bear markets, preventing their emotions from getting in the way.
Many investors feel more comfortable taking only long positions in trading, however, in order to take both long and short positions in the market, investors need to avoid emotional trading which usually results in trading short time frames.
Some traders tend to avoid taking short positions in a bear market as they will contribute in destroying the value of the asset. The difference between unsuccessful and successful traders is that successful traders attempt to take advantage of all circumstances, be it selling or buying the asset. It’s completely irrelevant whether you’re selling or buying the asset because the goal is to benefit from the two prices you’ve traded.
4 Tips for Trading the Bear Market
- Conduct fundamental analysis of the bear market the same way you do it for bull markets. Just like in any other circumstances, you should have a clear and strong reason to trade the asset in a bear market.
- Technical analysis is also the same for both bull and bear market
- Utilize stop-losses, use minimum leverage, margins and trade set-ups properly and regularly
- Protect your capital
Taking a Long/Short Position in Forex
Going both short and long in the same trade is not something uncommon in the Forex market. Experienced investors attempt to look at a range of currencies and identify the strongest and the weakest one. For instance, if the Euro was the strongest and the Japanese Yen was the weakest, you should take a long position for the EUR/JPY currency pair. This means that you’re practically taking two positions at once – long for EUR and short for JPY.
In conclusion, whatever the market circumstances, traders should try and use both short and long positions accordingly and conduct both fundamental and technical analysis in the same manner for both bull and bear markets. Novice traders seem to have a problem understanding that they can go short for something that you don’t own and buy it again in the future.
There’s nothing wrong about short-selling an asset, however, you need to have a clear and strong case for making such a move. After all, trading is all about attempting to capitalize on the difference between two prices and the order you do that is irrelevant.
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