Bear up: 4 strategies for taking advantage of a dipping market
Motivational speakers often say, “Life is full of the mountain top and valley moments. When you’re high up, enjoy it. When you’re down below, stay strong and cautiously navigate”. This is also true for trading.
When the market is green and everyone is happy, we know it’s a bull run. When the colour turns red it means we’re having a bear market.
The financial market experiences cycles of ups and downs, but traders can find opportunities well in both cases. How do you navigate downtime? Continue reading about how you can too take advantage of a dipping market.
What is a bear market?
A market is said to be bear when financial instruments’ prices continue to drop over time. Typically, it refers to a scenario in which market sentiment, wars, pandemics, political crises, and shifts in an economy may cause a decrease in the value of instruments. There are times when a bear market indicates an incoming recession, whereas a recession is defined as two consecutive quarters where a country’s Gross Domestic Product (GDP) stays negative.
There are generally two types of bear markets; minor corrections and full-fledged bear markets. A correction is when the broader derivatives market, such as the S&P 500, declines more than 10% from its recent highs.
Market corrections are common and can turn the table upside down. Corrections happen for different reasons, such as a negative economic report or poor earnings report issued by a high-profile company.
How to weather dipping markets and take advantage of it
Bear markets, just like bull markets, can provide many trading opportunities because of the increased volatility and speed of market movements. Such events can be a very useful indicator for traders.
It’s of course important to be aware of fake news and general market trend that can sometimes douse fear and emotional trading.
Taking advantage of a bear market involves taking a step back, maybe reexamining your portfolio, paying attention to news and reports, considering using leverage, maybe going short, staying put, or even buying more of a particular derivative.
4 strategies to keep in your arsenal while trading the bear markets
- Diversify your portfolio
Whether or not there is a bear market, diversifying your portfolio to include a variety of different instruments is a useful tactic. Similar to how there is no sure way to forecast when a bear market will end, it is likewise difficult to forecast which instrument will recover the fastest or see a rally once the market has stabilised.
Reducing your trade sizes may be necessary to diversify your portfolio, and be sure to get to know the instruments you want to trade. That’s where quality trading education comes in handy, and you should definitely utilize it if your broker offers it as a service.
- Dollar-Cost Averaging (DCA)
Dividing your reserve cash into smaller sums and engaging in a number of transactions simultaneously. This is what dollar-cost averaging is about. Adopting the DCA method in a bear market means you will be looking for profitable opportunities when prices reach a specific target. By using this method, traders are able to lessen the effect of volatility while purchasing a significant number of instruments, all at once.
- Stable coins
For traders, staying in stablecoins during bear markets is a popular and straightforward approach. Examples of stablecoins that traders could consider during bear markets include Tether (USDT), USD Coin (USDC), Binance USD (BUSD), TrueUSD (TUSD), and Dai (DAI). These stablecoins are pegged to the value of the US dollar and are generally considered to be among the most reliable and widely-used stablecoins in the crypto market. However, other stablecoins pegged to other fiat currencies, such as the Euro (EUR), the British pound (GBP), and the Japanese yen (JPY) may also be useful during bear markets.
Stablecoins could be a haven for traders to hold their instruments during unpredictable market conditions while waiting for the market to right itself.
- Seeking out undervalued assets
During bear markets, some assets may be sold at prices that do not accurately reflect their true value. Traders who are willing to do their research and seek out undervalued assets can potentially reap significant rewards. Identifying undervalued assets requires a thorough understanding of the asset’s underlying fundamentals and the market conditions that may be causing the asset’s price to fall. However, by taking the time to do this research, traders may be able to buy these assets at a discounted price and potentially earn a significant return on investment when the market recovers. While this strategy can be risky, it can also be highly profitable for those willing to do their due diligence.
The economy expands, and the derivatives market typically rises over the long term. This bullish trend may be interrupted by bear markets, but these downturns usually end and eventually turn around, setting new highs. You can buy equities at lower prices (“on-sale”) and build up stronger positions by trading during downturn markets.
As a general rule, avoid “panic selling” everything you own. Instead, use this chance to reevaluate your positions, DCA, diversify, calculate risk, investigate other instruments, consider stablecoins, follow the news closely, and look for buying opportunities to strengthen your long-term profit.
Disclaimer: Our content is intended to be used for informational purposes only. It is very important to do your own research before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Klips does not put available shares or any other underlying asset, but CFD derivatives based in underlying assets.