Posted: 30.06.2021 | 08:32
What is Bear Market?
A Bear Market is defined as a period in which prices decline in the financial market. Bear markets are extremely risky and difficult for inexperienced traders to trade.
Bear markets can cause huge losses and scare investors into re-investing. As soon as the price starts to drop, many people rush to exit the market. It does this to hold on to cash or to fix profits from a long position. A rapid bearish effect can also be seen as sellers who are in a rush to exit the market cause more people to sell out and exit their positions. If the market has high leverage, the drop could be multiplied further. Widespread liquidations have an even more devastating effect, and a heavy sell also creates liquidity. In bear markets, investors are constantly “bear-oriented”, in short, they expect prices to fall. This also means that market sentiment is low.
Bear Market Examples
Bitcoin experienced a serious bull market after its price rose to $20,000 in December 2017, and before the 2018 bear market, Bitcoin dropped 86% in 2014.
As of July 2020, the range around USD 3,000, which was the bottom of the previous bear markets, has been retested but has yet to be broken. Had it been below this low point, a multi-year Bitcoin would have made a strong argument that the bear market is still going on.
Other important examples of bear markets also follow from the stock market. The Great Depression, the 2008 Financial Crisis or the stock market crash in 2020 due to the coronavirus pandemic are important examples. All of these events caused great damage to Wall Street and deeply affected all stock prices.
WHAT IS THE DIFFERENCE OF THE BEAR AND BULL MARKET?
The difference is completely obvious. Prices rise in a bull market, while prices decrease in a bear market. Another important difference is that the bear market goes through long periods of consolidation. These are periods when market activity is quite low and trading activities are reduced. The same thing can happen in bull markets, but this is more common in bear markets.
How to Trade in a Bear Market?
One of the simplest strategies traders can use is to stay in cash or stablecoins. When it comes to trading and investment purpose, it is better to trade in the same direction as the market trend. Another strategy that will yield gains for bear markets is short positions. In this way, when the price of an asset decreases, profit can be made on this decrease. These can be daily, liquidity trades or position trades. Investors who are successful in trading take their profits and exit before the bear trend continues. Otherwise, there is a good chance of getting stuck in long positions while the bear market continues.
Click to read our article about the bull market, which is the opposite of the bear market.