Author – Mil
This article will discuss what a bear market is and how to handle them like a pro. Keep in mind that financial markets do not exist to satisfy your desires. They are designed to cause the greatest possible damage to the largest segment of the investing population.
Getting to Know the Bear Market
What is a bear market and why do they occur? The Bear occurs because supply exceeds demand, at least at the beginning. Buyers run out at the top because a point is reached where there is no demand, so price must drop in order to create additional demand. But then every subsequent “lower high” creates this same effect. And eventually, long holders panic, creating a huge supply of sell orders which leads to the final selling. Eventually, the market exhausts itself of sellers, and the smart money comes in with long demand. They are normally short in duration, extremely violent, and do tremendous damage. In the equities market, a Bear is considered anything worse than a 20% correction. In the cryptomarket, a typical Bear is closer to 3o to 50%, although the most recent correction has already surpassed the 50% mark.
The Market Driver: FEAR
The entire market is driven by fear. The euphoria at the end of the Bull market is driven by the Fear of Missing Out (FOMO), and the finishing move of the Bear is driven by the Fear of Preservation Of What Little is Left or Fear, Uncertainty, and Doubt (FUD). You can think of this bull-bear cycle as a FOMO-FUD cycle. The common word here is “fear.”
Preparing for the Bear
How do you prepare for the bear?
It is nearly impossible to determine the correct actions to take during a fast sell-off when emotions are running high. Your old risk management programming will take over. To handle the Bear better next time, follow these steps:
- Are you only using Risk Capital? Investing is important, but so is eating and keeping a roof over your head. It’s unwise to take short-term finds and invest them in crypto. As a general rule, you should never invest money that you can’t afford to lose.
- Are you an investor or a trader? You need to define before you open a position if you are a trader or an investor. If you go into something with a long term hold mentality, you are not allowed to change that midway through. Long term holders are going to get in with risk capital, and they don’t care if they lose 90% of the position a week afterwards because they’re thinking much longer term. Traders are going to get in with tight stops built in and look to build the position by buying low and selling high. Figure out which camp you belong to and stick to it. You are allowed to define multiple strategies for your portfolio.
- Define your exits BEFORE you enter your position. Your financial choices and decisions should be based on your objectives, risk tolerance, and horizon, not on what everyone else is doing, or worse, moves based on market panic.
In general, a Bear market is a welcome movement in the cryptomarket as a whole. Without the Bear markets, bubbles would form in the market, which would make everything destabilized and much more in risk of totally crashing. A Bear market shakes off the weak hands, and helps mature the market. Keep that in mind for your future trades. Do not fear the Bear market. Capitalize on it.