How to Make Money in a Bear Market

How to Make Money Trading in a Bear Market

6 min read

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 not a bad thing, though. It keeps stocks from becoming so expensive the average trader couldn’t afford to trade.

Knowing how to make money when the market is red is important. Bull markets are great. Everyone loves a bull market, but bear markets are important. You should know how to make money when the market is bearish. Otherwise, you’re sitting on the sidelines waiting for a bull market to return. Don’t miss out on the profit 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 need to know the strategies to employ.

How to Make Money in a Bear Market

Fear and Greed

Emotions move markets. It would be best to have focus and discipline because you’re taking advantage of others’ fear and greed. Please 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. Large patterns like descending triangles can hint at a future bearish market.

Then zoom in and see others like head and shoulder patterns. It’s so important to be able to spot bearish patterns. There are large and smaller bearish patterns, like shooting star patterns.

Candlestick patterns form and the bulls and bears fight for control. A bear market won’t be a surprise if you can find patterns and know what candlesticks mean.

Then, you can capitalize on these patterns and trade them. You learn patterns from knowing how to make money in a bear market.

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How to Make Money in a Bear Market With Short Plays

Now that you know the patterns, you can know which strategy to implement in a bear market. Shorting is one of the best ways to 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 will drop. If and when it does, you cover your position.

This is buying the shares back at a lower price. The shares revert to your broker, and you get to keep the difference in price from when you borrowed to when you bought.

Shorting is risky because if you make a mistake, you can, in theory, lose more than you risk. A stock can’t go below $0 but 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.

How to Make Money in a Bear Market With Put Options

Not every broker has shares that are too 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 to make money in bear markets; 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 time. The price you pay for the contract is the premium. A put option gains more value the more the stock falls.

If the price falls below the strike price, you can close the position for a profit. 

Final Thoughts

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 sit on the sidelines waiting instead of making money.

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