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CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

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Bear market trading: how to trade falling markets

In the world of trading and investing, the financial markets are the stage, and bears and bulls are the two primary players. Find out what causes bearish markets and learn more about strategies you can use to trade them.

Start trading today. Call +65 6390 5133 between 9am and 6pm (SGT) on weekdays or email for account opening enquiries.

Contact us: +65 6390 5133

Start trading today. Call +65 6390 5133 between 9am and 6pm (SGT) on weekdays or email for account opening enquiries.

Contact us: +65 6390 5133

What is a bear market?

Bear market’ is a term used to describe a type of economic climate characterised by markedly declining prices for most asset classes. In other words, markets are trending downward.

When most asset classes on the market experience a price drop of 20% or more, that generally signals the start of a bear run.

The opposite of a bull market, a bear market is generally a period of widespread pessimism which sees a large number of traders and investors offloading their positions in an attempt to cut their losses. This, in turn, can lead to prices falling even further.

That being said, bear markets can also present opportunities for profit, provided you understand them and know which strategies to use to take advantage of them.

What’s the difference between a bear market and a bull market?

The difference between a bear market and a bull market is that bear runs follow a downward trend, while bull runs trend upwards. They also differ in terms of supply and demand, and the way in which traders and investors behave.

Certain periods of time will be bull markets, during which demand (and risk-taking) will be at a high with traders. This will drive up market prices and, with it, enthusiasm for buying.

Owing to the cyclical nature of macroeconomics, markets will then contract once again, leading to a bear run. Typically associated with a receding economy, bearish downturns signify more supply than demand when it comes to trading.

It’s possible to make a profit in bear markets, but you’d need to use a strategy that’s suited to the pessimism associated with these markets – like short-selling.

Graphic showing the difference between bear and bull markets and the main characteristics that define them.
Graphic showing the difference between bear and bull markets and the main characteristics that define them.

Knowing how to spot the difference between a bear and a bull market is key to trading successfully, because both have very different rules.

It’s important to be able to recognise a true bear market and how to move in it. If, for instance, you were to confuse a short-term correction during a bull run with a bear market, your trades would probably fall far short of what you were hoping for.

Take a short-selling position

Going short is one of the most common strategies among traders in bearish times. As a trader, you’ll short-sell when you expect a market’s price to fall. If the market you’re trading on does decline in value, you’ll make a profit. If the price rises instead, you’ll make a loss.

With us, you can short-sell using contracts for difference (CFDs). CFDs enable you to take a position on price movements without taking ownership of the underlying asset. They’re leveraged, meaning you’ll only need to put up a small initial deposit (called margin) to open a larger position. However, leveraged trades are inherently risky, as both profits and losses are calculated on the total position size, not your margin amount.

Because there’s no limit to how high a market can go, short positions can – in theory – incur unlimited losses if the price of the underlying asset rises rather than falls. This, plus leverage, means having a risk management strategy in place is crucial. Part of this means attaching stops to your positions.

There are many ways to go short, depending on which market you want to trade.

Indices – going short on these instruments is a common way to trade in bearish times. That’s because indices like the FTSE 100 and US 500 track major global stock markets. They also enable you to predict on the performance of an entire group of stocks in a single trade, which could be less risky than putting all your eggs in one basket by betting against just one stock. What’s more, you can short key indices 24 hours a day using our CFD offering.1

Shares – you might short-sell shares if you think an individual stock has further to fall in a downturn. Let’s say you think rising interest rates spell bad news for the technology sector. You might short a tech stock that you think is exposed to this downside. If the market then behaved as you predicted it would, you’d make a profit off your position.

ETFs – like indices, ETFs give you the opportunity to go short on a number of stocks at once. An ETF’s exposure can span an index, or a whole sector or industry. Going back to the tech sector example, you could short an entire basket of tech stocks through an ETF – potentially spreading your risk – rather than shorting just one such stock.

If you’re looking to short an index specifically, indices trading might be better for you because it’s likely to be the more cost-effective option.

Commodities – you can go short on the price of commodities like oil, gold or silver. For example, you may believe supply is going to outstrip demand for soybeans in the near future. So you’d decide to short the price of soybeans. If you’re correct and the price does actually fall, you’ll profit.

Pros and cons of going short:

  • You can make money if you go short and prices fall
  • You can, however, also make a loss. And, since there’s no limit to how high asset prices can climb, your potential for loss when going short is theoretically unlimited
  • With us, you’ll short-sell with leverage using CFDs. This means you can open a larger position with a smaller amount of capital (called margin) as an initial outlay
  • Leveraged trades mean greater potential for larger profits and losses, since both are calculated on your full position size and not your margin amount
  • If you’ve gone long with other positions, going short enables you to hedge in a bearish market

Find a good entry position

In any sort of market, finding the right entry position – the exact point at which to open your position – can make or break a trade.

This is especially true for bear markets. Opening a position at exactly the right moment during a downturn creates opportunities for traders to go short and make a profit if their predictions are correct.

However, because bearish climates are ones where rapidly falling prices, negative sentiment and spikes in volatility can be seen, there’s a faster and greater risk of bigger losses. That’s what makes having an effective risk management strategy with stops on your positions all the more important.

Most experienced traders use technical analysis to determine the best entry position for them.

Discover strategies for finding your best entry position

Trade the VIX

A useful index to keep an eye on during downturns is the VIX (volatility index). The VIX tracks market volatility and, as such, can be one of the first indicators to show that a bearish downturn is approaching.

While some traders only monitor the VIX, others will actively take a position on it. The VIX typically has a negative correlation with other indices and stocks – meaning that when the prices of other assets are going down, the VIX is likely to go up.

This makes it a popular choice among traders for diversifying and hedging their exposure – both of which are helpful in bear markets.

Trade indices and ETFs

The VIX is just one avenue you can use during a bear run. You can also trade many other indices and ETFs, which is a popular strategy when markets are trending downward. That’s because both give you exposure to a whole group of stocks all at once, enabling you to predict on them directly.

ETFs encompass an entire basket of shares, often representing an industry or a sector as a whole. They also fall into the category of ‘thematic investing’ – for example, you can trade cannabis stocks on the whole as a theme.

In addition to regular ETFs, you can take a position on short or inverse ETFs, which are designed to profit when the underlying benchmark declines. These are similar to shorting a security, except instead of borrowing an asset to sell, you’re buying the market. So, inverse ETFs enable traders to profit in a downward market without having to short-sell anything.

Both indices and ETFs are ways to diversify your portfolio during a bear market. Generally, the more types of assets you have or trade during a bearish time, the more you can manage risk by hedging your exposure to any one market.

Diversify your holdings

This brings us to an often underestimated, but very well-known strategy to remember during bear markets – diversity is your friend.

Traders can diversify by holding various positions in completely different asset classes. While by no means a foolproof strategy, diversification can help reduce the risk you might face if you had exposure to just one or a few asset classes.

For example, the US 500 may fall during a bear market, but some of its constituent companies may not. So, instead of only trading the index itself, you could target specific high-paying dividend stocks. Or you could even trade bonds, where prices often move in the opposite direction of stock prices.

The more diffused your risk is during unpredictable times – like bear markets – the better you’ll be able to weather the storm, most of the time.

Learn how to diversify as a trader

Focus on the long term

One of the strategies that traders can use during downturns is to, like bears themselves, hunker down and wait out the winter.

This is because of the cyclical nature of markets. While bearish periods are difficult to endure, history shows you probably won’t have to wait too long for the market to recover. Bear markets are followed by bullish rallies – always – and upswings often occur sooner rather than later.

Find out how to trade bull markets

Trade safe-haven assets

It makes sense to look for refuge in stormy economic climes. For many traders, that refuge is safe-haven assets.

Safe-haven assets are those that tend to retain or increase in value during volatile times when many others do poorly. This is often because they’re negatively correlated with the economy.

The most famous example of a safe-haven asset is gold, but there are others – like government bonds, the US dollar, the Japanese yen and the Swiss franc.

However, it’s important to remember that – even with assets that are traditionally considered safe havens – your chances of making a profit in a bearish market aren’t guaranteed.

Trade currencies

As you can see from the safe-haven list above, there are some currencies that are known for doing well when markets are declining.

To try profit from this, you could take a position on the price of a declining economy by opting to short a currency. For example, you’d sell GBP/USD, if you thought the value of the pound would fall in comparison to the dollar.

A word of caution here, though – forex markets are notoriously volatile in tough times. During market downturns, it’s a good idea to understand the relationship between exchange rates and stock prices as much as possible to take advantage of any declining prices. However, there isn’t necessarily a clear-cut relationship, making it vital to perform thorough fundamental and technical analysis before opening a position.

Trade options

Trading options contracts, commonly known as options, gives you the right – but not the obligation – to buy or sell an underlying asset at a specific price by a set point of expiry. This means that you can choose not to exercise this right if you want.

Two common options strategies for hard times are:

  1. Buying put options
  2. Writing covered calls

When you buy a put option on a stock, you’d do so believing that the company’s share price will drop in value. If the share price fell or stayed the same, you’d make a profit. This is different to going short with normal derivatives trading such as CFD trading, where you’d only make a profit if the share price dropped.

This can be less risky than traditional short-selling because, should markets suddenly turn more optimistic, you can just let an option expire without incurring any costs.

Writing covered calls is another trading strategy that could be useful in a neutral to bearish market. This strategy involves selling a call option against a stock that you already own. In other words, you agree to sell the stock you own to the holder of a call option. If the holder (ie buyer) chooses to exercise the option, you’ll sell the stock at the specified price.

If you were already planning on selling your stock, this strategy could provide a way for you to profit from that sale – even with the market in decline.

Why do people want to trade in bear markets?

Taking a position in a bear market might appeal to some people because:

  • Bear markets can mean opportunities to buy top stocks and other assets for less than you’d be able to otherwise
  • Some markets, such as bonds, defensive stocks and certain commodities like gold often perform well in bearish downturns
  • Bear markets can be an opportunity for traders – depending on their risk appetite – to short-sell and make a profit if they correctly predict when prices will fall (or make a loss if they don’t)
  • For investors, bear markets can offer valuable lessons, such as learning to not make hasty decisions based on emotion and instead hold on to long-term positions, even when they underperform in the short term

How to start trading in bear markets

  1. Research your preferred market
  2. Create a live account or practise on a demo
  3. Take steps to manage your risk
  4. Open and monitor your first position

What causes bear markets and how long do they last?

The different types of bear markets (which we’ll discuss later) are caused by various things, including macroeconomic events like recessions and normal downturns in the business cycle.

As such, there are no hard and fast rules as to how long a bear market will last. The best way to determine this is on a case-by-case basis, watching each bear market for signs that it will continue or that an upswing will occur.

How to identify bear markets

There are a few signs that herald bearish times. These include:

  • Declining economy: when the economy contracts, it’s usually a sign that the stock market will also take a downturn. This can even lead to a recession
  • Failed market rallies: uptrends that don’t gain any momentum and fizzle out are the most common sign that a bear market is approaching because they point towards the bulls losing control of the market
  • Rising interest rates: this usually means that consumers and businesses will cut spending, causing earnings to decline and share prices to drop
  • Outperformance of defensive stocks: if consumer staples companies start to enjoy significant gains, it often signifies that a period of economic growth is over, as people are purchasing less luxury or unnecessary items

How often do downward markets occur?

As we’ve discussed, there are a number of factors that can lead to downward markets. This means it’s hard to know when and how frequently they’ll hit.

In addition, not all downward markets are created equal. Retracements and pullbacks can happen multiple times a day during periods of heightened volatility, while larger downturns like corrections, bear markets and recessions happen less frequently. For example, analysts tend to expect one market correction every two years.

One thing that can be predicted is that upswings and their correlated downturns are often in proportion to one another. So, bigger swings in market momentum like bear runs tend to happen less but last for longer and have a greater fallout. For example, the most recent bear markets of note were caused by the 2008 global financial crisis and the Covid-19 pandemic. Both lasted hundreds of days.

That being said, it’s important to remember that markets are cyclical and will experience both highs and lows.

Bear markets vs economic recessions: what’s the difference?

Bear markets are closely associated with economic recessions, but they’re not the same thing.

A bear run is a period of continuing decline in the prices of the market. However, since the extent and the duration of the decline are difficult to pinpoint, it’s simply taken to mean a significant downturn.

Recessions, on the other hand, are far more specific. They’re times of negative growth or a reduction of at least 20% in the gross domestic product (GDP). They usually need to last for at least two consecutive quarters for analysts to declare a recession.

While they’re not the same thing, bear markets and recessions often have the same causes (eg geopolitical crises) and effects (eg negative sentiment, uncertainty and reduced consumer spending).

What are the different types of bear markets?

Analysts and market experts differentiate between bear markets based on what caused the downturn. There are three different types of bears:

  • Event-driven: when macroeconomic headwinds cause a downward spiral in markets’ prices
  • Cyclical: when the market automatically corrects itself after a time of bullishness at the end of a business cycle, usually set off by climbing inflation and interest rates
  • Structural: when a financial bubble or some other kind of economic imbalance collapses, the resulting instability causes bear markets, eg the misplaced internet-related overoptimism in the market during the 1990s caused what was known as the ‘dotcom bubble’

Is a bear market good for trading or investing?

A bear market is neither good for investing or trading, nor bad for it – it’s simply a part of the business cycle. This means some markets will underperform during a bear market, while others will outperform.

Just like during any other market, doing research and technical and fundamental analysis will determine which trading or investing strategy is best for you during a bear run.

What’s the difference between a bear market and a market correction?

A bear market is a period of significantly depressed or falling prices for most asset classes and can be caused by multiple things, such as economic crises.

A correction is limited to that specific asset, and is usually far shorter-term. It’s the market changing momentum to decline slightly after a period of significant optimism in order to balance or ‘correct’ itself.

How can I tell if a bear market is coming?

Watch for signs like market upswings failing to gather momentum, economies contracting, sudden uptrends in defensive stocks like consumer staples, and rising inflation and interest rates.

How can you profit from a bear market?

No one can guarantee you a profit, or a loss, from any market. But you can maximise your chances of a profit in a bear market by following bearish-friendly strategies. These include diversifying your exposure, focusing on the long term, taking a short-selling position, and trading or investing in safe-haven assets.

Can you lose money during a bear market?

You can lose money in any market. With the volatility, pessimism and uncertainty that tend to come with bear markets, it’s an especially important time to ensure you’ve got an adequate risk management strategy in place. This is especially true if you use short-selling as a bear market strategy.

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1 Key indices are available for dealing 24 hours a day, between 7.02am Monday and 6.15am Saturday (Singapore time) during non-Daylight Saving periods and between 6.02am Monday and 5.15am Saturday (Singapore time) during Daylight Saving periods. Other indices are offered only when the underlying market is open. Please ask dealers for information about public holidays.