You need to know how to make money in a bear market. Shorting, naked puts, put debit spreads and call credit spreads are great ways to make money when the market is bearish. The stock market is a tug of war between the bulls and the bears. Sometimes the bears take over. When a bear market occurs, stocks can lose money. That’s a not a bad thing though. It keeps stocks from becoming so expensive the average trader couldn’t afford to trade.
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How to Make Money in a Bear Market
Learning how to make money in a bear market is a good skill to know as a trader. There is tremendous money to be made in bear markets just like in bull markets. You just need to know the strategies to employ.
Fear and Greed
Emotions move markets. You need focus and discipline because you’re taking advantage of others fear and greed. Don’t get caught up in the emotion because others will profit from it.
A bear market takes effect when there’s a 20% percent or more drop in the market. The good news is that bearish markets don’t last as long as bull markets.
Bear markets usually occur during a recession or depression. When pessimism prevails, the market drops but in all the red there’s profit potential.
The Patterns to Trade
Patterns are a huge part of trading. These patterns will tell you how to trade. The large patterns like descending triangle patterns can be a big hint to a future bearish market.
Then zoom in and see others like head and shoulders patterns. It’s so important to be able to spot bearish patterns. There are large bearish patterns and smaller bearish patterns like shooting star patterns.
Candlesticks patterns form and the bulls and bears fight for control. As long as you can find patterns and know what candlesticks mean, a bear market won’t be a surprise.
Then you can capitalize on these patterns and trade them. You learn patterns as a result to know how to to make money in a bear market.
Short Plays
Now that you know the patterns, you can know which strategy to implement going in a bear market. Shorting is one of the best ways you can learn how to make money in a bear market.
Short selling allows you to borrow shares from your broker at a higher price in anticipation that the price is going to drop. If and when it does you cover your position.
This is buying the shares back at the lower price. The shares revert to your broker and you get to keep the difference in price of when you borrowed to when you bought.
Shorting is risky because if you make a mistake, you can, in theory, lose more than you risked. A stock can’t go below $0 but it can go up forever.
Risk management is important in short selling. Keep a tight stop so that if a trade goes against you, you don’t lose a lot of money. Not every broker has shares to short.
Find a broker that is good for shorting. Read our Interactive Brokers review as they’re a good shorting broker. If you can’t find one that works for you, there is another way to make money in a bear market.
Put Options
Not every broker has shares to short so if you have one of those brokers, there is another way to profit in a bear market. Options trading is another tool to use as you learn how to make money in a bear market.
Options give you the right but not the obligation to buy (calls-bullish) or sell (puts) a stock at a specific price (strike). In other words, you control shares without owning them.
Put options make money in bear markets and you don’t have to borrow shares. One contract controls 100 shares so the more contracts you buy or sell, the more shares you control.
A put option is the right to sell a stock at a set price within a certain amount of time. The price you pay for the contract is the premium. A put options gains more value the more the stock falls.
If price falls below the strike price, you can close out the position for a profit.
Bottom Line
Learn how to make money in a bear market because the market trades in cycles. There will be a point in time when the bears take over. If you don’t know how to capitalize on a bear market, you will be sitting on the sidelines waiting instead of making money.
