The bearish market condition is when the stocks of 9 out of 10 sectors see a continuous downtrend. (9 out of 10 is just for reference, not to scale). The bearish market is something that almost every trader is afraid of. Almost every trader, but not every trader. The learned traders know how to make money in such cases as well. Short selling is one of the best-known techniques to earn in a bearish market.
Need a real-life example? Go watch the Big Short. Christian Bale plays the lead of a physician who had a hobby to monitor the markets. The doctor realises that the market is about to crash and goes short on a falling market that seems to be flourishing and so much that the housing market was driving the economy of the USA.
The predictions of the doctor came true, and the markets did fall. Nevertheless, the character that was portrayed by the brilliant actor Bale made more than $ 3 Billion at that time.
The important thing to remember here is that the doctor was strong in his predictions; he used precise mathematics and calculated almost every risk.
So this was an example of how the markets fall and how people make money off of it. But making money in such a situation is never an easy task. So let us understand more about the bearish markets and how to make money in the bearish markets.
How long do bearish markets last?
While the bearish and bullish markets are highly subjective in terms of the asset that is being traded and might last according to the economic conditions that asset is a witness to, the average length of a bearish market is slightly more than nine months. The bull runs are significantly higher, lasting upto three years sometimes.
This is an idea of a bearish market that is tracked over an index. To keep the picture clear, indices( plural for an index) track the total economic development of a country. There may be cases where a particular asset might see a bearish trend and the time-lapse for the same is subjective to the economic conditions around that particular sector only. If the trader is unaware of the situations that are going on in the market, then he or she can suffer from a vision that can see nothing but bear trends. The market has to be studied extensively before making any move. Without that, almost any and all capital can die.
What are some market conditions that might look like a bearish trend but aren’t?
There are ascertainable events in the market that might trigger the trader to think that it is the beginning of a bearish trend, but that is not necessarily the case. Let us look at some examples where the market is just being its regular self and not turning into a bear.
1. Market Retracement:
The technical indicators can help a trader in defining a retracement from a trend. Retracement is just a regular market process that it undergoes, and there is nothing that should concern the trader of it. Of course, there can be times when the retracement gets bigger and camouflages a downtrend but yet again, listen to the indicators more than you listen to the gut.
These are the instances where the market just starts running opposite to what it was a moment ago. Reversals can happen both ways, an uptrend can become a downtrend, and a downtrend can become an uptrend. Look out for reversals via specific candlestick patterns like triple bottoms.
Every stock has a metric called the 52 week high. A 10% or less decline in this metric is called a correction, and it happens every now and then. So again, look out for specific candlestick patterns that indicate a correction and not a trend.
How can I make money in a bearish market?
One important thing to remember whenever the market is falling is not losing the cool and following the herd. Since the bearish markets tend to run at an overall lesser pace than the bull markets, they will not be an issue for long term investors. For example, The DowJones could fall for, say, 4000 points and still be at its highest position in the last ten years.
The long term investors are looking for a profit in the long run, and hence they should not be startled by a bearish market. The market has a tendency to move not in a streamlined motion but in an up and down trajectory; since that is the case, there will be instances where the prices will plunge. These situations are not necessarily the ones where the market is falling but the ones where the stock price is being a witness to fluctuations.
To make money in the bearish market, always do two things.
- Do the math.
- Go short.
Going short on the stocks can be hard and punishing if the math is not right, but as cruel as it sounds, shorting is probably the only way to earn in a falling market. Let’s read more about how to make money in a falling market:
When people talk about the one single rule of trading, they say: buy low, sell high”. They are talking about long positions or when the market is seeing a bull run. Shorting can be something like buy low, sell lower. (Again, not to scale). Going long means making money when the asset is gaining value, and going short is making money when the asset is losing value.
You can sell some shares of a stock from your broker for a particular asset even when you do not own them. And then when the price has finally declined to the levels that you have predicted, you buy them back. This is how short selling is squared off. Whatever remains after giving the broker its commissions is the profit in this case.
There can be different methods via which one can go short on the market. Let’s look at them:
Going short; The traditional way:
As discussed above, the way to borrow the stocks from the broker and then buying them back when the prices hit a low is called short selling. The idea is to let the market fall and still make money; however, there is no limit to the risk that persists during short selling because once the market begins rising, there is, on paper, no limit to the levels it can touch. If your predictions were wrong and the market began rising, then you would have to buy back the shares at a higher price than the one that you sold them. If that is not a loss, nothing ever is.
Going short Via Derivatives:
Derivatives have a good trait. These are purely speculative assets and do not require the trader to own the asset on which the speculation is being made. It doesn’t matter if you are dealing in CFDs or you are spread betting; whenever you get into either one, there is an option to speculate. The speculations can be anything. If you think that the market will fall, then you can short your CFD contract.
When you are spread betting, you’re again speculating over a direction where the prices are headed. If you are shorting a spread bet, you are looking at a result that would be in the case of a traditional short sell.
Dealing in short derivatives:
A short ETF is a fund that is specifically designed for the cases of a bearish trend. This fund is majorly made out of Futures contracts. These funds are traded on a daily basis by fund managers, and since that happens more than frequently, there is no guarantee that they will succeed.
If you expect a particular index to fall, you can buy an inverse ETF for that index, and if it does fall, then the inverse ETF will rise.
Always remember that these are not long term investment solutions against a falling market. Rather, they are hedging techniques that a lot of traders use to hedge their stocks against daily ups and downs. Nonetheless, the inverse ETFs can be effective for momentary growth if the market falls.
What if I just want to be safe during a bearish market?
Playing it safe can be a better option in a bearish market because there is no guarantee of how much the stock will fall, if at all. If it does fall, certain market specifics can save you from a capital failure. Let’s read about them:
1. Trading or holding the BlueChips:
The blue-chip stocks are the one that sees the least volatility and are stable in their own sectors. There can be times when they shake too, but they will just shake, not fall. You can always invest a part of your capital in the stocks that you think are never going to cripple. Examples are precious metals and the stocks like Amazon, Berkshire Hathaway, Google, to name a few.
2. Looking for shares that are good at dividend yields:
The dividends are parts of earnings that the company puts out for the shareholders. In the case of a stock market rally, these stocks can ensure the safe delivery of some money.
3. Filter the best stocks:
When the stocks in the bear market fall, the good and the bad ones fall together, the difference is that the good ones will rise again. If you can identify the ones that have the capacity to bounce back, then a bear market is the best time to buy them since the prices are low.
To filter out such stocks, technical analysis can be of great help. You can look for them via charts that have been displaying strong signs of a reversal. (The reversal here will be the uptrend).
How do I begin trading?
To begin trading, the first thing you need is a brokerage account. You don’t have to look for the perfect broker because we bring you the leading online broker HFTrading.The broker has been in the market for a lot of time and is the trading name for CTRl investments. The Cyprus Securities and Exchange Commission regulates the parent firm. (CySEC). Traders can trade on more than 300 CFD tradable assets via three different trading accounts via the broker. Each account is created by keeping the level of expertise a trader might hold.
HFTrading operates in the regions of NewZealand and Australia. The broker also provides one of the best trading platforms, MT4, to the traders for trading purposes.
The broker’s assets for trading include the very liquid forex, more than volatile crypto and a lot more.
Frequently Asked Questions:
1. What are CFDs, ETFs and Futures?
CFDs stand for contract for differences, ETFs stand for exchange-traded funds, and futures are almost similar to CFDs. The thing that is common in all of the three trading instruments is the fact that each one of them is all about speculation and since that is the case, they can be of great help while there is a falling market.
2. Why does the market fall?
There can be various reasons as to why the market sees a fall. However, the majority of the reasons are associated with the chief indexes that track the whole country’s growth, and the reasons are visible there.
The bearish market is never a good sight to see. But some things can be done to avoid a lot of financial losses in such cases.
Traders can always do the things that are discussed above and make sure that their funds are safe. The game with the bearish markets that everything seems to be falling apart and the word around the street is” just sell”. Don’t just sell; wait and see calmly what is happening and why is it happening the way it is. You might find a better way to avoid losses.