As we all know, the global market is extremely volatile. Even experienced investors can panic in times of uncertainty: no one knows when it will happen, how long it will last, and how much it will impact stock prices.
Most of us know that we will survive a falling market, but few know that you can profit from it as well. In today’s trading, all you really need is movement. It doesn’t matter if the prices go down or up – there are plenty of opportunities to make money. Here we tell you how to stay on top of the next bear market.
What is the bear market?
Just when you think the economy is doing well and your portfolio performance is steadily increasing, market volatility is popping up out of nowhere. When stock prices fall, it often happens that the market falls with them.
Speaking the language of finance, falling markets are also referred to as “bear” markets. If you are new to trading you may be wondering what “bears” have to do with this. In fact, there are even more mammals involved: A “bull” market, as opposed to a bear market, refers to a stock market that is rising or is expected to rise.
So how did all these animals get into finance? Well, there are actually a few theories about it. The most popular is derived from the way these animals attack their prey: a bear slides down with its paws while a bull pushes up with its horns. In both cases, zoological terms are applied to the market when prices move 20% or more over a period of two months or more.
Why the markets are falling
The stock market is known to have its constant ups and downs. Over the past decade, it has gone from the depths of the Great Recession to new records.
There are many reasons that can cause a market to fall. Economic crises, political developments, changes in national economic policy or even a bad public relations campaign by a large corporation can result in a bear market. The main indicators of falling markets, among others, are low productivity, low employment rate, declining corporate profits and low disposable income. Traders and investors always expect something new to happen that could push stocks lower.
The continued fall in stock prices results in a downtrend that investors expect to continue, which in turn reinforces the downward spiral. Finally, the sellers, frightened by an unexpected economic event, cause a stock market crash.
The dilemma of falling markets is that you never really know whether it will be just a 5-10% correction or a much deeper price drop. It can be quite tricky to determine the best timing and manage active trading on the cusp of a bear market.
How to trade in a bear market
Now that we have defined a bear market and identified its causes, we can move on to trading techniques that can be used successfully during this downturn.
A great way to protect your portfolio from losses is to use options contracts:
- Buy puts. Buying puts is a typical trading strategy in a bear market with high reward potential and relatively low risk. To be profitable, the stock price must drop below the strike price of the put option, so that the option is in the money before expiration. In this case, the loss is limited to the option price paid.
- The call to the bear spreads. This strategy offers low risk but limited returns. Profit is the premium paid by selling out-of-the-money calls while simultaneously buying in-the-money calls. Once this technique is used, investors expect the stock to fall below the strike price of calls sold before expiration in order to maintain premium. If the market moves against you, out-of-the-money calls serve as insurance, limiting your loss to the difference between strike prices.
- Bear put spreads. A downward put spread trading strategy involves buying an in-the-money put option and simultaneously selling an out-of-the-money put option. This technique limits your loss to the amount you pay to enter the trade and provides a fair return once the stock closes below the out-of-the-money put before expiration.
However, one of the most popular strategies for investing in a bear market is to sell short. This practice involves borrowing stocks that you don’t own, selling them when the price is high, and then buying them back after the price drops. You can also short “against the box”, following the same algorithm but with the stocks you already own.
Short selling can be easily done using today’s most popular financial tool: Contracts for Difference (CFDs). These are ideal when you want to take advantage of a specific price drop or drop in a business. Without needing to own the actual asset, CFD trading gives you the option of using leverage, which can be as high as 1.5 hours, which means you can control much larger volumes of shares by depositing capital. initial smaller. It also greatly amplifies your potential gains, as well as your potential losses.
Margins and leveraged trading can become your best friends during the bear market. If you use them wisely, they will be of great use to you.
It is very important to be patient. Don’t be in a rush to sell your stocks and get out of the game. Continue to collect your dividends and hold onto the stocks, because a bear market does not last forever. Review your portfolio, keep an eye on company statistics, and act on it. By employing some of the strategies mentioned above, you can do very well during times when many others are experiencing large losses for their portfolios. Ultimately, to be a successful trader, market movement is all you need.
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