Bear Market In finance, a bear market is identified as a longer-term downward movement in the financial markets. As a general rule, bear markets begin once prices have fallen by 20% or more from a recent high and continue to fall over a matter of weeks or months. Bear markets are different from bull markets in much more severe ways than simply price movement.
Bull markets have price increases and optimism about the future. Bear markets have price declines and pessimism about the future. Additionally, bull markets have increasing confidence from investors and bear markets have losing confidence from investors.
When things are going down it factors into our decisions and fear serves as the primary motivator. Market psychology matters in a bear market. Panic sets in for market-tiers as sellers increase the selling pressure. Nobody wants to catch a falling knife. Think about it like a bargain bin in the classroom. It keeps getting cheaper for weeks.
Causes of a Bear Market
Bear markets are often a result of several factors. For example, the decline is often kickstarted by the economic fundamentals. Growth in GDP may decline, enter negative territory, the market perceives economic activity in this way and corrects. Interest rates change unexpectedly. Inflation cannot remain over a set of comfortable levels.
Policy shocks can also contribute to swift declines in the market, for example, a financial crisis that destroys confidence in the markets, overnight. Political risks create uncertainty, natural disasters may disrupt some economic activity; trade wars can destroy relationships between countries.
Identifying a Bear Market
Recognizing bear markets as soon as possible gives traders a significant advantage. A traders first clues will arise from price trend analysis. A bear market will show a series of lower lows and lower highs. The entire direction will be down for an extended period.
Next is technical analysis that validates trend analysis. Sometimes price trends can fool us. Moving averages will give you the most straightforward signals. If the shorter MAs are crossing below the longer MAs, then you know that bearish momentum is building. If the 20-day MA crosses below the 200-day MA, that is a signal that a major trend has changed.
If the RSI shows readings below the 30 levels, then prices are oversold. But that is just one piece of information. In bear markets, the RSI will remain depressed for multiple weeks. Bollinger Bands will show increased volatility. Money prices often hover near the lower band.
Behavioral Aspects in a Bear Market
Just as fundamentals lead bear markets, psychology is also a component. Fear will reign supreme. Objectivity is overcome by panic. This will create a huge opportunity for those traders that are prepared.
Panic selling comes in waves. First, the weak hands (retail investors) exit their positions. Second, large institutional investors start to sell. Finally, forced liquidations cause the capitulation event. Each wave sees a very broad degree of volatility.
Historical Case Studies
The banking system initiated a bear market in currencies that lasted around eighteen months and was the worst since the Great Depression.
Between 2007 to 2008, the EUR/USD currency pair fell from 1.60 to 1.25, while many exchanges witnessed sharp declines in transaction volume, or 'liquidity' during important moments of crisis.
Bear Market Tips for CFD Traders
Be extraordinarily cautious with the usage of leverage in bear markets. Because losses can multiply quickly in volatile bear markets, you should decrease leverage from normal levels. 10:1 is more than enough leverage - utilize a 10:1 ratio compared to 50:1 or greater.
Loss management becomes paramount as you stay alive in the game. You have to use stops, and place them at appropriate technical levels. Don't ever move a stop against your position. If the stop is hit, take your losses. Staying disciplined in this will save your account from devastation.
Are You Ready to Profit From Bear Markets
Bear markets allow traders to differentiate themselves from traders that lose money. The strategies and direction in this guide offers some foundational pieces for trading bear markets successfully, however, knowledge without action is not enough. Put this knowledge into action today. Open a demo account and practice short selling techniques. Test out different technical indicators and backtest them against historical bear markets. Skyrocket your trading skills before risking your capital.
Join our advanced forex trading community today and get access to live market analysis for the whole volatile period. Get advice and learn from seasoned traders that have managed multiple bear markets with success. You will also receive trading alerts in the form of a text message or email to your smartphone, for high-probability trading opportunities.
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