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Sylvain
May 10, 2022 11:11 AM

Either you spent the weekend in a cave or if you have noticed, the market has largely fallen over the past few days. When panic takes hold of the markets to this extent, it is legitimate to wonder if it is still possible to make money.

Well, yes! Even if it is a bit more complicated than during a bull market, it is possible to make money even during a prolonged downturn.

Let’s talk about how to survive a bear market together. Are you ready? Let’s get started!

How to recognize a bear market?

Before we dive into the best ways to resist a bear market, we need to start at the beginning, which is how to recognize a bear market. As you know, the market does not move in a straight line and is often a series of highs and lows. In the case of an uptrend, we will have a sequence of lower and higher lows and a sequence of higher and higher highs as well. We can start to feel the tide turning as soon as we have a high point that is lower than the previous one.

This will then invite buying caution and prepare us for a reversal to a downtrend. As soon as we break an important support level and mark a lower point than the previous one after the lower high, we can consider that we are in a bearish trend. This is one of the simplest rules of price action for trend detection.

Alternatively, we can also use a long term moving average to gauge the state of the market. Above a simple 200 period average, we can then consider a bullish trend, and conversely, we will consider a bearish trend below it.

What could explain the current downtrend?

A trend reversal always occurs after a period of euphoria, there are several factors that can explain the fall we have been witnessing for the past 6 months and which has continued in recent days.

– An uninterrupted rise in the markets

Since the subprime crisis of 2008, the classic equity markets have been in an uninterrupted uptrend, boosted by an accommodating monetary policy. The most critical phase of this policy was the massive injection of liquidity in the year 2020 alone, due to the Covid.

High interest rates mathematically drive stock prices down, which is why the recent interest rate hike by the FED, in an attempt to curb inflation, was seen as bad for the stock market, which is in risk-off mode. Like it or not, crypto remains highly correlated to the classical market.

– The geopolitical context

The geopolitical context and the recent rise in interest rates make the dollar a safe haven again.

How to trade cryptos during a bear market?

In a bull market, the best solution is often to use a trend following system, which allows us to ride the trend as long as possible. In a downtrend, price movements tend to be more impulsive and last less time than in a bull market. It takes a long time to build everything up and a very short time to destroy everything. This sentence sums up the behavior of the market in a downtrend quite well.

Short

You can opt for a short strategy, using indicators such as the longer moving averages as a filter. As long as you are below these, you only take short positions using, for example, oscillators. In the context of a short position, it is important to know that the profit potential is limited to 100%, in case we leave a position open until its value reaches 0.

This is an extremely rare case, but it nevertheless underlines the necessity of using a stop-loss and a take profit when shorting the market. Conversely, in a bull market we may leave our position open longer.

DCA

If you are not particularly comfortable with the idea of shorting, or if you don’t have a well-defined strategy for doing so, you can simply accumulate during downturns, so that you have more assets when the market rises again.

The best way to do this is to identify important support and resistance levels and place buy orders on these levels by splitting your entry position. If you want to invest 10k, then you would split that into several positions, for example 5 of 2000k at different prices. This will give you a better average price.

Algorithms

The use of algorithms, if you feel capable of creating them yourself or if you have access to some of them, will allow you to approach a bear market with less stress. A Bot is of course not perfect but it at least allows you to not have to worry about your emotional control.

Conclusion

In conclusion, you should keep in mind that trading in a bear market situation is more complicated, so your control of emotions will once again be paramount to avoid a catastrophe. Alternatively, if you have access to algorithmic trading solutions, which trade both long and short, this will allow you to approach the bear market in a serene manner.