Despite the fact that a bear market is a rather tricky condition for traders, even in such a situation, experienced traders find ways to make a profit. To maximize income during a bear market, investors often resort to techniques such as:
1. Short Selling.
Short selling is a trading strategy that involves borrowing securities, goods, or currencies with the intention of selling them at a lower price in the future.
In the future, when the price of stocks, goods, or currencies falls, the trader buys borrowed assets at a lower price, covers the short position, and makes a significant profit.
2. Buying Defensive Stocks.
This strategy is often used by participants in the stock markets to reduce risks. Investors acquire securities of companies that produce products in constant demand by consumers regardless of the economic situation. These are often manufacturers of food products, consumer goods, and pharmaceuticals, in other words, everything that people use in their daily lives. During a bear market, companies producing such goods tend to perform the best.
Diversifying an investment portfolio means distributing the investor's capital among stocks, digital currencies, precious metals, and other instruments. Not all assets can fall significantly at the same time. Expanding the range of assets can help significantly minimize risks and smooth out portfolio volatility. It is important to understand that diversification does not guarantee 100% protection against losses.
This type of portfolio combines both reliable and risky digital assets. As a result, it has a moderate level of risk, and the overall capital growth with this investment approach is also moderate.
Bear markets often have characteristics that can identify them. Here are some of them:
1. Bear markets often reflect a general economic decline (reduction in production, rising unemployment, slowing GDP, deteriorating corporate performance) and occur during recessions.
2. A powerful catalyst for the downward trend in markets is often government policies. For example, recent restrictions imposed by the Chinese government on digital assets caused a significant decline in the cryptocurrency market.
3. A bear market is not equivalent to a correction. During the latter, assets typically decline by 10-20% compared to recent highs over a period of up to two months. A correction can be considered a short-term impulse necessary to cool an overheated market. Meanwhile, a bearish trend is a long-term process that can last from two months to several years.
4. If the main secret of making a profit in a bull market is selling assets at a higher price than they were bought, there is simply no clear strategy for behavior in a bear market. This is because predicting the onset of a downward trend is extremely difficult. The exact dates of it becoming bearish are known only in retrospect, that is, when the bearish cycle has ended.
5. Traditionally, investor behavior during a bear market is divided into optimistic and pessimistic. Optimists buy assets in the hope of market growth and profit, while pessimists actively sell, expecting a decline. The overall state of the market depends on the balance of sentiments between the two: more hope leads to market growth, more fear leads to a decline.