8 Ways to Improve your Trading Strategy During a Bear Market

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In both bearish and bullish market conditions, assets of all kinds will experience both price increases and price decreases over time. In many cases, increases and decreases can both be expected to occur within a single hour.

Even if these changes are relatively small, they still indicate that someone is either increasing or decreasing their marginal wealth.

While the onset of COVID-19 caused the stock market, along with many other markets, to lose a considerable amount of capital, it has also created many opportunities for risk-tolerant traders to increase their wealth.

While you will want to be sure to take plenty of active measures to increase your wealth, bear market trading strategies are often very effective.

Whether the economic fallout from COVID-19 persists or subsides, it will be important to learn how to trade under every possible market condition.

After all, the markets in 2020 have been measurably more volatile than ever before. While volatility indicates a risk to some traders, for others, volatility is really just a code word for opportunity.

In this article, we will discuss eight ways to improve your trading strategy during bearish conditions.

By taking the time to understand these methods—and implement them into a broader trading strategy—you can successfully exploit natural market changes, no matter what the future has in store.

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Here are the 8 ways to improve your trading strategy during a bear market

1. Buy Puts

Puts options, which are a type of options contract, are ideal for bearish markets because they offer a limited downside (the most you can lose is the price of the contract) and put options increase in value as the price of the underlying asset is falling.

Put options give traders the option to sell an asset at a specific price in the future. Purchasing these options can be extremely effective for traders who believe prices are about to fall.

They can also be used to help control the risk that comes with holding longer positions. Put options can be purchased for individual companies, but they can also be purchased for index funds that are expected to decrease in value.

2. Adjust Your Stop Order Ratios

Stop orders are used by traders to exit a position when an asset’s price either drops below or moves above a predetermined value.

In essence, these orders make it possible for traders to automatically “lock-in” their earnings at an acceptable level or cut their losses once a price has dropped too far.

If you normally use a 1:1 stop order ratio, consider increasing the ratio to 2:1. You may also want to consider broadening your acceptable range (5 percent swings to 10 percent swings) in order to allow for the market’s increasingly volatile movements.

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3. Shorten Positions

When markets are bullish, it is easy to just put as much capital as you can into an index fund and ride the market’s broader growth.

Countless people did these between 2010 and 2020 when the markets experienced a very long period of growth. When markets are bearish, on the other hand, you may want to shorten how long you hold a given position.

Things are generally trending downward, meaning you are working against the market average.

To maximize your profit potential—while also minimizing exposure to risk—you will likely need to enter into and exit out of the market more frequently. Switching from swing trading to day trading may be in your best interest.

4. Diversify Assets

Diversification is the most reliable method for reducing the asset-specific risk found in a given portfolio.

Even when the stock market, as measured by major indexes, goes down, there are often many “contra” assets that will increase in response. Gold, for example, has enjoyed quite a rise over the past few weeks, as have other commodities.

You may also want to consider investing in various ETFs that have typically increased during bullish conditions. The more diversified your portfolio can become, the less likely a single asset will cause it to collapse.

5. Fundamental Analysis

During times of tremendous economic uncertainty, the government—along with various other institutions and entities—is much more likely to take dramatic actions that can potentially influence the market.

Even just looking at the news cycle surrounding COVID-19, it becomes clear that every time Congress has even hinted at possible stimulus packages (both for corporations and for individuals), markets have experienced dramatic short-term upswings.

The same can also be said about the Federal Reserve, whose monetary policy decisions are almost immediately reflected. Rather than just relying on hard data, paying close attention to the news can make it easier to find new opportunities.

6. Sell Naked Calls

Naked call options are profitable when the market price of the underlying asset remains below the strike price of the asset on the expiration date.

If a stock is trading for $90 during bearish conditions, $100 near-term call options will likely be pretty affordable and will have relatively little risk.

Additionally, as we have seen with other bearish options trading strategies, naked calls are an excellent tool for controlling the exposure to risk that comes with other positions.

7. Use Offsetting Options

As suggested, options contracts will be one of your most useful assets during a bearish market.

These contracts can be used to create situations where you can either profit from the market experiencing a general state of decline—which is exactly what a bearish market is—or you can mitigate the amount of risk that comes other, specific conditions.

Purchasing calls and puts together, for example, can help you gain significantly more control over how your portfolio is influenced by sudden market changes.

8. Trust Long-Term Decisions

Bearish market conditions have actually been proven to skew people’s decision-making processes and cause them to make irrational decisions.

The “scarcity mindset” causes people to sell when their assets are underpriced and buy when assets are overpriced—the exact opposite of what a profitable trader should do.

When you see your portfolio losing value, don’t panic and sell everything, otherwise, you will “lock-in” your losses. Even when the stock market experienced its worst year in 1931, its best year occurred in 1933. Being willing to trust your long-term decisions can go a long way.

Trading strategies during a bear market chart reading

Conclusion – 8 Ways to Improve your Trading Strategy During a Bear Market

Bearish markets can be extremely profitable, but they can also be rather difficult to navigate. By keeping these essential tips in mind, you can continue pursuing your trading goals, even as the market experiences a general state of decline.

Learn more about starting out in the crypto space by reading this helpful crypto guide.

And if you want to find out where are the best cryptocurrency exchanges to implement your new trading strategies read our popular guide on the best crypto exchanges of 2020.

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