A bear market meaning is when the market drops at least 20%. Bear markets can be scary to traders but it doesn’t need to be. There is money to be made no matter the climate.
The stock market trades in cycles. What goes up must come down. If it didn’t we’d be in trouble. Think about it. If price continued to climb, eventually no one would be able to trade.
However, bear market’s keep price from climbing so high the everyday person couldn’t afford to trade.
To define the bear market meaning would be a market where price is falling so selling is encouraged. In other words, traders are pessimistic about the economy.
When the economy is slow and sluggish traders are less inclined to rush in and buy. Hence the importance of looking at the major exchanges and futures. When the S&P futures is looking bearish, you can bet stocks will be selling off.
Conversely, look at the candlesticks that are forming. If it’s doji candlesticks the indecision can really affect the market. If bearish candlesticks are the norm, then you know selling is in full effect.
Traders may be taking their profits and short sellers are coming in to profit on the results of profit taking. There has long been a belief that bear markets were bad because of loss.
That doesn’t need to be the case. Knowing the strategies to use in a bear market will equip you to make a profit whether short selling or trading options.
There are four phases in a bear market. The first phase starts with a lot of investors and high prices. This may seem like a bull market on the outside but it’s not. Investors are starting to take their profits and drop out of the market. This causes phase two.
Phase two of a bear market sees profits start to drop significantly. Corporate profits are waning and trading activity drops. The positive economic outlook starts to take a turn to the negative side. This causes remaining investors to panic.
Then the third phase begins. This is the speculator phase. What is a speculator? This is a trader who trades commodities, bonds and/or currencies. They take a higher risk for a higher reward.
They are the more seasoned traders. This then causes prices to start rising a little and volume to come back in.
The fourth and final phase of a bear market still sees prices dropping although more slowly. There isn’t a sharp fall in price anymore. The low prices and the good news start attracting buyers. Buyers come back in and a new bull market begins.
Sometimes a bear market meaning is confused with a correction. However, they are different. A correction is a short term trend change. It only lasts a few weeks to a couple months.
A correction allows good entries to value investors and swing traders. A bear market does not. There’s no way to tell where the bottom of a bear market is.
Without knowing the bottom, you can’t find a good entry point. Bear markets make recouping losses harder especially if you’re trying to long.
Luckily, there are other strategies you can use to make money in a bear market.
Can you make money in a bear market? Absolutely. Short selling is one of the most popular way to make money in a bear market. Shorting is when you borrow shares from your broker at a higher price and sell them.
You then buy the shares back at a lower price, also known as covering you position. The shares you bought back are given back to your broker. Your profit is the difference between the price you sold at and the price you covered your position at.
Shorting can be done in any market as there is always going to be profit taking. You can ride a stock up and then ride it back down.
Not all brokers have great shorting ability. So what do you do if your broker doesn’t? Are you stuck on the sidelines during bear markets? Not at all.
Put options are the answer. An option gives you the right but not the obligation to buy (calls) or sell (puts) a stock at a specified price (strike price). A put option is the bearish equivalent. Read our post on put and call options explained.
You can use put options to speculate on price falling and then hedge your bets. One options contract controls 100 shares. In essence, it ends up being cheaper to trade.
Options aren’t as cut and dry as shares having time decay and implied volatility as well as intrinsic value that affect price.Read our post on implied volatility and its meaning.
The important thing is to study options before trading them.
The bear market meaning is when the market loses at least 20%. There is money to be made in this type of market. You have to be willing to put in the time and study the different strategies. If you’re not willing to do that, then you’re not going to be able to sustain long term trading.
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