A bear market is a prolonged period of falling prices in which the broader market or a specific asset class loses 20% or more from its recent high. For example, bear markets are common in crypto when virtually all coins are in the red.
In the stock market, bear markets are usually driven by fundamental factors. During a downtrend, many traders panic and start selling assets at a loss. Is this the right approach, and how can you take advantage of a bear market? Find out in this article.
The article covers the following subjects:
Major Takeaways
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A bear market is a prolonged decline in the prices of some assets. It lasts more than a month and involves a price decline of more than 20%. A structural recession can affect several asset classes.
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Signs of a bear market include a strong downward move, a broad market decline, and structural crises in specific industries.
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Causes of a bear market include geopolitical conflicts, the bursting of a market bubble, widespread panic among traders, and institutional investors deliberately driving prices down to buy promising assets at lower prices.
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Bear market trading strategies include averaging down by buying a falling asset in portions, opening short positions, moving into safe-haven assets such as gold, bonds, and the Swiss franc, and following institutional investors’ positions.
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Ways to reduce risk in a bear market include avoiding leverage, hedging with derivatives, diversifying your investment portfolio with safe-haven assets, setting stop-loss orders, and closing losing long positions early.
What Is a Bear Market?
A bear market is a prolonged market downturn in which prices fall 20% or more from a recent high. A downtrend is accompanied by worsening macroeconomic indicators, declining investor confidence, and sellers dominating the market.
Signs of a bear market include:
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Sharp sell-offs, sudden breaks below support levels, and unusually large candlestick bodies. A gradual downtrend can also be considered a bear market, but the term more often refers to a sharp decline in market prices.
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Broad market decline. Most assets within the same asset class are in the red. This can be seen on heat maps of stocks or cryptocurrencies, for example. A bear trend across several markets can signal a severe recession.
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Worsening macroeconomic conditions. Slow or negative GDP growth, high inflation, rising interest rates, higher unemployment, and declining corporate earnings.
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Capital flows into safe-haven assets such as gold or the Swiss franc, which tend to rise amid falling stock prices. Capital may also flow into bonds or cash.
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Declining liquidity. Most market participants want to sell, but few buyers are available. As a result, prices fall even faster.
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Extremely low Fear and Greed Index readings, high VIX readings, and similar indicators.
The chart above shows BTC alongside the Fear and Greed Index. It shows that during prolonged downward moves, the indicator entered the extreme zone. This confirms a bear market rather than a temporary correction.
Why Bear Markets Happen
Bear markets can develop naturally or be deliberately triggered.
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Natural bear markets occur when fundamental factors or widespread panic drive selling.
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Deliberately triggered bear markets occur when large investors intentionally push prices down to buy large volumes at more favorable prices.
In the first case, the bear market may last a long time, with no guarantee of recovery. In the second case, it may be short-lived and followed by a rapid, strong rebound.
Causes of a bear market:
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Geopolitical crises. Wars, trade conflicts, sanctions, and pandemics can disrupt supply chains and reduce production. Amid uncertainty, many investors move into safe-haven assets.
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A market bubble bursting. Periods of excessive optimism can overheat the market. Asset prices rise above their fundamental value. At the peak, large investors take profits, which can trigger a market crash.
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Investor psychology. Panic, driven by fundamental factors, prompts traders to close long positions and sell their assets. The greater the selling pressure, the lower prices fall, prompting even more investors to sell.
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Deliberate actions by large investors. Institutional investors gradually sell assets near the peak, causing share prices to decline. Retail investors then start selling the falling asset, pushing prices even lower. Institutional investors may later open long positions at prices significantly below their initial levels.
The strength of each factor, or a combination of several factors, determines the momentum, depth, and duration of a bear market.
Let’s look at some of the most notable declining markets:
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2020, the COVID-19 pandemic. One of the fastest market downturns. It lasted just over a month. The US stock market fell 34% but recovered in a record five months, supported by massive monetary and fiscal stimulus.
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October 19, 1987, Black Monday. The acute phase lasted about three months.
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2007–2009, the global financial crisis. The prolonged market decline lasted about 17 months, with the S&P 500 falling 57%.
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2000–2002, the dot-com crash. It lasted about two years, with the technology sector suffering the largest losses.
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1929–1932, the Great Depression. It was the longest bear market in US history. It lasted almost three years, with stocks losing about 85% of their value.
Bear Market Trading Strategies
How can you profit from a falling market? Not every bear run is the same. Downtrends in major currency pairs are rarely prolonged. Major economies may take measures to keep their currencies at desired levels. Sharp declines do occur, such as a fall in the AUD against the US dollar due to natural events. However, over the long term, currency pairs tend to trade within certain ranges. Therefore, the same trading strategies can generally be used in both downtrends and uptrends.
Stocks and cryptocurrencies are more complicated, as market downturns can be accompanied by a global recession. In a bear market territory, it can be difficult to find assets to buy because it is unclear how long the recession will last or whether the market will recover. It is also difficult to predict which assets will return to their previous highs and which will not.
Short Selling
The simplest option is to open a short position and trade with the trend or use a swing trading strategy. However, there are several drawbacks:
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A market is considered bearish when asset prices fall by more than 20%. By that point, however, it may already be too late to open a short position.
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Opening a short position at an early stage, for example after a break below a key support level, can also be a mistake, as the breakout may be false.
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There is also a risk of a stop-out.
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The potential profit on a long position is theoretically unlimited, as an asset’s price can rise many times over. With traditional short selling, the maximum profit is limited because the asset’s price can only fall to zero, while potential losses are theoretically unlimited if the price rises.
Bear Market Investing Strategies
Let’s look at some bear market strategies:
1. Averaging down. Buying assets in portions instead of investing the entire amount at once. This approach involves buying an asset in portions as its price gradually declines. This approach lowers the overall break-even point, allowing the position to become profitable even after a modest market recovery. Michael Saylor, founder of Strategy, used this approach during a bear market, accumulating BTC in anticipation of a bullish reversal.
Advantages:
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Buying an asset at lower prices reduces the average entry price and lowers the break-even point.
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No need to time the entry perfectly. You buy at different times or price levels.
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It helps reduce the impact of market volatility.
Disadvantages:
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A substantial capital reserve is required. Funds remain tied up throughout the bear market and may not become available again until the market recovers.
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Leverage should not be used, as positions may be closed at a loss due to a stop-out.
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Emotional pressure. The further the asset price falls, the harder it becomes to resist closing the positions.
Example:
BTC is in a prolonged downtrend. Suppose you first buy BTC at $120,000. Excluding fees, your average entry price and break-even point are both $120,000. You then buy the same amount of BTC each time the price falls by another $20,000. If you buy the same amount again at $100,000, your average entry price and break-even point fall to $110,000. The next purchase is made at $80,000.
Remember, this strategy is highly risky. It will only work if the market eventually enters a bull run.
2. Switching to defensive stocks or other asset classes. If there are clear signs of a prolonged bear market, there may be little point in holding an asset that continues to lose value. Instead, investors may move into defensive assets that have historically been more resilient during market downturns. Once the market bottoms out and the trend turns bullish, investors can buy back the previously sold asset at a lower price.
Advantages:
Disadvantages:
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Risk of a false signal. It is difficult to identify both the beginning and the end of a prolonged downtrend.
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Missing a sharp rebound. Markets can reverse very quickly. There is a risk of buying back the previously sold asset at a less favorable price.
Example:
Amid the hostilities between the US and Iran in early 2026, major indexes such as the S&P 500 fell sharply. The recovery began only in April, when the situation became clearer. Investors moved large amounts of capital into money market funds, short-term US Treasury bills, the energy sector, and oil.
3. Reversing a position from long to short without leverage. Markets constantly move up and down, and traders need to know how to profit from price movements in either direction. If a bear market is confirmed, for example by a break below a strong support level, long positions are closed, and short positions are opened. The position size may remain the same or be adjusted depending on the strength of the downtrend.
Advantages:
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Efficient use of capital. Funds do not remain idle during a downturn but continue to work.
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Profiting from a falling market. Instead of staying out of the market and waiting, traders open positions that may generate a profit.
Disadvantages:
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After a long position is closed, the market may quickly reverse upward, leaving the newly opened short position at a loss. This can happen in the stock market or when investing in high-risk assets.
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Risk of a false breakout below the support combined with high volatility. The market may reverse before short positions recover the losses from earlier long positions.
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Risk of a short squeeze. A short squeeze is a sharp, rapid rise in an asset’s price that forces short sellers to buy back shares to close their positions and limit losses. This wave of forced buying creates strong demand, pushing the price even higher.
That is an example of GameStop’s second short squeeze in May 2024. The stock had been declining for a long time, providing opportunities to open short positions. However, a single social media post was enough to send the stock sharply in the opposite direction. The danger of such a short squeeze is that stop-loss orders may not be executed at the specified price. Slippage can wipe out several months of profits within hours.
4. Following institutional investors. This bear market trading strategy can work when the downturn is driven by large market participants. If short positions are rising without any clear fundamental drivers, the market may be being deliberately pushed lower. The strategy is to wait for the price to fall to a support level where buyers’ stop-loss orders are concentrated, break below it, then reverse and move back above it. A long position is opened once the price breaks back above the support.
Advantages:
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Following institutional investors may increase the chances of a successful trade.
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Clear entry rules, with specific signals for when to open a position.
Disadvantages:
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Risk of a false breakout back above the support, followed by another decline
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Determining whether a market decline is artificially driven is subjective. The downtrend may have fundamental causes that the trader has overlooked.
Example:
Many traders see a bear market as a signal to sell immediately or even leave the market. For others, however, it is an opportunity to profit from widespread panic. Don’t rush to give in to fear of losses. Instead, try to use the downtrend to your advantage.
Risk Management in a Bear Market
Risk management in a bear market focuses primarily on limiting potential losses and preserving capital.
Let’s look at some ways to manage risk:
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Avoiding leverage. With a high pip value on a long position, a Margin Call or even a stop-out can occur quickly.
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Portfolio rebalancing. Reviewing the portfolio and adjusting the asset allocation to current market conditions.
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Portfolio diversification. Spreading funds across different asset classes rather than putting everything in one basket.
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Hedging with other instruments. In the stock market, derivatives such as put options and inverse ETFs can be used for hedging. Another option is locking, which involves opening an opposite position of the same size in the same instrument. However, given the trading costs involved, it may be simpler to close losing positions.
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Using stop-loss orders. Stop-loss orders can help limit potential losses, even if slippage occurs.
The simplest way to reduce risk is to exit the market and wait for the downturn to pass. One advantage is that there are no costs associated with keeping positions open during the downturn.
Conclusion
A bear market differs from a regular downtrend in its broader structure, the number of assets affected, its depth, and its duration. The simplest approach is to exit the market or move into safe-haven assets and wait for the downturn to pass. However, this means accepting the loss psychologically. If an asset has already fallen significantly, the decision to sell should depend on the reasons for the decline, its fundamental outlook, and your risk tolerance. A steep decline alone does not mean that prices will necessarily recover.
Trading bear markets can generate profits during a downtrend, but an asset cannot lose more than 100% of its value. Therefore, unlike trading in bull markets, the potential profit from a decline is limited. Try out bear market trading strategies with a free LiteFinance demo account.
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