Bear Market Trading Strategy: How to Save Capital and Profit in the Bear Market

Bear Market Trading Strategy: How to Save Capital and Profit in the Bear Market

The bear market has set in.

Bitcoin, the safe haven of crypto has just reached a bear market territory at the time of writing this article. Bitcoin just set a new lower low under $27,000, a price we haven’t seen since late 2020. If this trend continues, the crypto market may officially experience the dreaded bear decline.

However, many crypto traders will argue that we’re already in the bear market, which is reasonable because of the recent events and all the factors weighing down the crypto market.

So, this begs the question: Is day-trading in a bear market still possible? Are there any proven and effective bear market trading strategies?

Bull Market vs. Bear Market

The bull market is a fun and exciting ride. When cryptocurrencies, especially Bitcoin, hit all-time highs, everyone is in the green. Many traders and investors can make a profit.

But, even though the bull market feels good, it’s the bear market that can make crypto traders even richer. Knowing the right strategies on what to do in a bear market will save your capital and give you lots of opportunities.

If you’re a crypto trader and have some bear market strategies up your sleeve, it’s the perfect time to use them. The bear market is one of the best opportunities to earn more in a relatively short time.

But let’s talk more about the bearish market strategy later!

First, you have to know the difference between a bull and a bear market.

The Bull Market

It’s when almost all crypto turns green. Usually characterized by uptrends, we experience the bull market because of the positive outlook of the people towards their investments. It also happens when the economy is doing well, which backs more investments or spending.

As a general rule, the market officially becomes bullish when the price of an asset increases 20% from its recent low. Thankfully, a positive sentiment coupled with a good economy can drive the market on a sustained upward trend for many months or years.

The Bear Market

It’s the opposite of the bull market. It’s that dreaded time when prices of cryptocurrencies fall, and red engulfs your entire portfolio. Usually characterized by downtrends, we usually enter the bear market due to a poor economic backdrop and negative sentiment from investors/traders.

Now, how long is a bear market? Although the bear market can last for months and years, the bear market is actually not a problem for many experienced crypto day-traders out there. Traders can implement several proven bear market strategies to reap significant earnings during these tough times.

Proven Bear Market Trading Strategies

When the market drops, the biggest wealth transfer happens. It’s only a matter of perspective and strategy that will determine your position in the spectrum – losing or winning.

Fortunately, there are several proven ways to ensure your position on the winning side.

Short Selling

Often referred to as “shorting”, short selling is an investment method where traders can profit from an asset’s price drop. It’s called short selling because you are “short”; you don’t actually have the assets you want to sell.

Shorting works by borrowing an asset and selling it at its current price. Later on, the trader should purchase those assets back to repay them. Hopefully, you can purchase them back at a significantly lower price. Therefore, you will have spent less money to purchase the assets and earned more when you sold them.

Sounds cool, right? Here comes the nasty part: Shorting has a lot of limitations. Your profits are capped because most companies (lenders) set a specific time limit for when you have to return the assets you borrowed. Meaning: You have to buy back the assets no matter the result. While profits are capped, losses can extend far beyond the initial investment.

“Buy The Dip”

Many newbie investors and traders get scared and panic, which leads to a mass selloff. This is where brave buyers can enter the game and take advantage of the opportunity. In a bear market, you can accumulate more for less; in a bull market, you can accumulate less for more. With this logic, it’s easy to understand why many experienced traders take advantage of the bear market to accumulate more assets.

Easier said than done!  

Identifying what to buy in a bear market is actually difficult. While everything is turning red, uncertainty rises. How can you know where the bottom is when a cryptocurrency dips? Sometimes, what seems to be a “dip” is just extra market volatility.

So, here are two signals you should consider spotting “dips’ like an expert. Generally, a dip could be initiated by one of these two scenarios:

  • A Temporary Correction in a Bull Market
  • A Crash that Results in a Bear Market

You can check the price chart of a cryptocurrency, set it to one year, and try to spot a long-term price trend. Now, if you see that the price has been consistently trending up, the dip is probably just a temporary correction. On the other hand, a reversal of the uptrend during the recent month could indicate a long-term market crash.

A rule of thumb: It’s safe to buy dips when it reaches the support level of the cryptocurrency price. A support level refers to the crypto’s price level where it does not fall below many times. These support levels are created because of the tendency of buyers to enter the market when the price dips.

Stay Out of the Market (Or Not)

People tend to get emotional during a bear market. A red portfolio can easily drive a person to make bad investments or trading decisions. Fear plays an important role in crypto trading, especially during a bear market. It could either be the fear of missing out (FOMO) or the fear of losing.

Whatever happens, DO NOT PANIC! Stay calm and look for the value during bad times. Things are going to turn back around.

Crypto traders have to be vigilant about their emotions, especially during tough times. To avoid fear and the bad decisions that come with it, you have to stick to a solid strategy about how to make money in a bear market. Otherwise, you can just stay out of the market in the meantime. Do your research and prepare for the arrival of the bull market.

Let Your Cash Work

During a bear market decline, the worst thing you can do is chase your losses. Instead, you can strategically take some risk off the table by raising some cash.

Look for safe havens when investing in bear markets.

There are a lot of other investment opportunities when you’re holding a significant amount of cash. You can invest in short-term bonds, commodities, real estate, and other financial assets. If you’re going to dabble in stocks, you should choose the ones with high dividend rates.

On the other hand, holding your cash is also a safe way to prevent losses during a bear market. If you’re unwilling to dabble in other opportunities, investing your time in improving your knowledge and skills also means earning future profits.

Reduce Your Position Size

The bear market is always an unchartered territory. Traders are advised to proceed with caution.

Reducing your position size is a key element of portfolio risk management. You may take trades that are too large for your account if you don't know how to properly proportion your positions. Therefore, you’ll become vulnerable when the market moves even just a few points against you.

Don’t put all your crypto in one basket. If you commit 100% of your account to a single position, you can blow your entire funds in just one mistake. Taking positions representing a large portion of your overall portfolio will also lead to limited opportunities. You would need to pass up on opportunities you may have liked to enter.

Implementing a fixed percentage limit per trade or a fixed amount per trade are recommended position sizing strategies. A hard limit on each trade allows you to tolerate many losses, protecting your capital and letting you trade another day.

Another proven way to protect your capital is doing a dollar-cost averaging. This strategy decreases your exposure to price volatility. So, you can decide which crypto you can invest in for the long-term, the amount you want to allocate, and the frequency with which you will invest. This means investing $10 per day or $100 per month on Bitcoin regardless of its current price.

Encouraging Words During the Bear Market
Be greedy when others are fearful, but do it strategically.
Bear markets won’t last forever. Red will eventually turn into green. When that happens, you can sell the cryptocurrencies that once dipped for a much higher price.
Embrace proven and tested crypto trading principles, and stick to facts and logic.
When markets tank and people get scared, logic and facts go out the window. When the market takes a nosedive, people with great positions sell because of the fear of uncertainty or doubt.
Avoid making bad trading decisions during a bear market by adopting proven bear market strategies and sticking to them no matter what.
And, as always, Do Your Own Research.