The Best Trading Strategies used in a Bear Market

A bear market is the market where the stock prices and the value of the market in general starts falling due to a negative news or an unexpected occurrence. A bear market or a slowdown can be classified into two types- cyclic and structural.

A cyclic slowdown is a one off scenario where markets go negative due to the changes in the business cycle. This generally lasts for a shorter duration and is a part of the business cycle. On the other hand, a structural slowdown is a one-off shift from the existing business cycle. It is a more deep rooted phenomenon which changes a lot of other factors such as consumption patterns per capita income, GDP etc.

While markets recover from a cyclic slowdown fairly quickly, the time period required to recover from a structural slowdown often spans upto several years.

In such cases, how should you plan your trades so that you can earn profit Let’s understand a few methods.

Top Trading Strategies used in a Bear Market

1. Short Sell Bad Stocks

2. Invest into Safe Havens

3. Find Good Stocks to Buy

4. Shift to Defensive Stocks

5. Try Hedging Strategies

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1. Short Sell Bad Stocks

When stock markets turn negative, good stocks go down but bad stocks stay down. Here, good and bad stocks are decided essentially on the basis of the fundamentals of the parent company. Bad stocks are those which have highly dependent business models and need the strong ecosystem to function. When the ecosystem for these companies collapses, the company’s operations suffer. Hence, such stocks can be sold off during the times of crisis. On the other hand, Good stocks are those which easily adapt too change in circumstances and recover quickly when the negativity subsides.

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2. Invest into Safe Havens

It is a well established fact that when the equity markets go down, the commodity markets go up. Especially safe haven commodities such as Gold and Silver, which are among the favorite assets which people love to invest their money in. In case of a bear market, when the wealth invested in equity markets is going down, investments in gold pay-off as the prices definitely go up. Hence, investing in gold is a always a sure shot investment strategy as markets start looking doubtful and on the verge of a slowdown.

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3. Find Good Stocks to Buy

When a market is down due or is in a bear grip, it is the best time to invest money in good quality stocks which are often available at cheap valuations in a bear market. While the bad stocks should be sold at the beginning of a bear market, Good stocks should be purchased when the bear phase of the markets is drawing to an end. Although no one can exactly judge as to when the bear phase will get over, the perfect time is when stock markets start showing some signs of optimism and prices start reversing from negative to positive.

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4. Shift to Defensive Stocks

Each type of company has its own business cycle and needs. In times of a booming market when the wealth of investors grows, companies which sell big ticket size items such as cars, high technology machinery, real estate related companies etc. make profit and prosper, with their share prices going up. However, when the markets are down, people focus on saving money and hence only buy essential goods such as household items medicines etc., hence, the sectors such as FMCG and pharma would offer a better avenue for investments.

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5. Try Hedging Strategies

When the markets are going in the negative direction, hedging strategies such as buying put options short selling future contracts etc. can help you in minimizing your losses. A put option is a contract on a stock which gives the holder a right buy on the obligation to buy sell a stock at a future date. This helps in earning income through put writing in a bear market. Also, you can try to short sell the futures contracts of stocks or commodities whose prices you think will drop further to make profits.

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Conclusion:

These are a couple of trading strategies through which you can earn profits in a bear market. However, if you wish to understand more about these strategies, the best option would be to take help from a certified investment advisor. They can suggest more such trading strategies which are used for earning profits in the midst of falling markets.

A lot of these strategies depend on the timing in the markets and the stage of the bear markets. A bear market is never permanent since the general direction of any type of a market is upwards. Hence, strategies used for trading in a bear market can only be short term ones and not for a longer duration.

You must be careful and exercise caution while entering in a bear market and should only do it after in depth research.

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