How to earn in bear market?
Despite the fact that the bear market is a headache for traders, savvy speculators find out how to earn on a downtrend. Here are popular methods to make the utmost gains during the bear market.
1. Short selling.
Short selling is a trading strategy which means that an investor borrows securities, commodities, or currencies with the aim of selling later at a lower price.
After a while, when market quotes of shares, commodities, or currencies fall, a trader closes short positions by buying the borrowed assets back at lower quotes and returns them to a broker, thus gaining a substantial profit.
2. Buying defensive stocks
This strategy is commonly employed by stock investors to minimize risks. In a nutshell, investors purchase securities of companies producing merchandise that enjoys steady demand among consumers regardless of economic conditions. In most cases, such companies produce food products, consumer goods, and medicines, in other words, the stuff needed in everyday life. In periods of the bear market, the companies producing such merchandise or services demonstrate strong earnings
3. Diversification
Diversification of an investment portfolio means the distribution of an investor’s capital among different asset classes such as stocks, cryptocurrencies, precious metals, and other financial instruments. All assets cannot slump in parallel, thus being exposed to risks. A wide variety of assets enables an investor to reduce risks and level off the volatility of the investment portfolio. Importantly, diversification does not guarantee 100% protection from losses.
This type of portfolio combines conservative and high-risk assets, which makes it a medium-risk investment. However, this also means that your profits will be moderate.
Specifics of bear market
Bear markets can be recognized by some particular features. Let’s get to know some of them.
1. Most frequently, bear markets mirror an overall economic downturn, namely, a decline in the manufacturing sector, growing unemployment rates, a slowdown in the national economic output, poor corporate earnings, etc. A recession is commonly accompanied by bear markets.
2. Oftentimes, a government’s policy acts as a powerful catalyst for a downtrend in financial markets. Recent crackdowns by China’s authorities on digital assets set the stage for a crash in the crypto market.
3. A bear market should not be aligned with a correction. Indeed, amid a correction, assets drop in value by 10-20% from recent highs during two months at most. A correction can be viewed as a short-lived downward move needed to soothe the overheated market. On the other hand, a downtrend is a long-lasting process that could develop from two months to a few years.
4. The key to making profits in the bull market is selling assets at a higher price than they were bought. Therefore, there is no clear-cut strategy for trading during the bear market. This is because it is extremely complicated to predict the onset of a downtrend. Its precise dates become obvious only in retrospective market analysis, i.e. when the bear cycle has come to an end.
5. Traditionally, investors’ behavior during the bear market is divided into optimistic and pessimistic. Optimists buy assets in the hope that the market will reverse upwards and will bring profits. In contrast, pessimists sell assets betting on a market decline. The ratio of optimistic investors and pessimistic ones determines the overall market sentiment. When more investors express hope, the market grows. Vice versa, dominating fear pushes the market down.
