Day Trading in a Bear Market
What is a Bear Market?
Bear Market is a market condition in which stock prices are falling due to negativity and pessimism in investors’ sentiments. Statistically, if individual security or an entire index drops down by more than 20% over a long period, it is considered to be in bear territory.
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During bear market, investors’ confidence is quite low, and they tend to sell off their securities for fear of prices dropping further and potentially losing more money. This leads to a vicious cycle of a downturn. Share prices, trading activity, and dividend yields tend to fall in bear markets, and the market is characterized by widespread panic.
What is a Bull Market?
Contrary to the bear market, the bull market is marked with increased investor confidence and optimism. Stock prices go up for long periods of months or even years.
As a result of the increasing share prices, investors develop confidence in the stock and market keep buying, increasing the prices further. A bull market indicates a strong economy that coincides with strong GDP, less unemployment, and increment in corporate profits.
How Is A Bull Market Better Than A Bear Market
For day trader, as there are much fewer shorters than longers, a bull market is generally considered better than a bear market. The bull market represents positivity in share prices, investor confidence, and the overall favorable economic condition of a country’s or the world’s economy. With the exponential rise in buying of securities, investors use several appropriate strategies to make substantial profits.
Is The Market Condition Of Relevance to Day Traders?
Bull market, by definition, means a sustained increase in the price of securities ‘over a long period.’ The opposite applies to a bear market. Thus, the market condition is only relevant to the classic investors who intend to hold on to the securities for an extended period. Classic investors buy in a bull market, hold positions for a substantial time, and sell when the price has theoretically reached its peak.
Day traders, on the other hand, generate profits based on intraday volatility of the stock price. They buy and sell (or short and cover) stocks multiple times within a single trading day and end up making profits or losses depending on the moves. Day traders tend to close all their trading positions at the end of the day, making them immune to the long-term price movements.
Overall, day traders are less considerably impacted by the classical condition of the market. For day traders to generate profits, the market must move, irrespective of which direction. Day traders only look for opportunities within the day, based on volatility, and such opportunities are mostly equally prevalent in both bull and bear markets, and in some cases even more attractive during bear markets.
Example and Analysis of a Profit-Making Trade by a Day Trader in Bear Market
The best strategy a day trader deploys to make profits in a bear market is short selling. Short selling involves borrowing shares from a broker, selling them at the market price, and then repurchasing them at a lower price to return to the lender. Day traders turn substantial profit due to the difference in the higher market price at which shares are sold and the lower market price at which they are bought later.
For instance, a day trader in a bear market believes that the price of a security ABC is going to fall soon. He borrows 100 shares of the company from a broker, and short sells these shares at the market price of $25 per share. He receives a cash inflow of $2,500. Later, after the price drops to $20, he buys the same 100 shares from the market for a total cash outflow of $2,000. These shares are then returned to the lender. In the process, day trader ends up making a profit of $2,500-$2,000= $500
Tradenet is the world’s leading trading education academy. It teaches the tricks of the trade to aspiring traders, including how to make money in a bear market or a bull market.
Tradenet offers extensive trading education through its education packages. The education packages include self-study courses, training videos, and access to live trading room, with a 14-day free trial.
New traders can also watch several educational videos on Tradenet’s YouTube channel, including how to choose the best broker for day trading and how to add to a winning trade, among others. Traders also have the opportunity to take the 5-day demo challenge with Tradenet and stand a chance to win a $14,000 live trading account.
With Tradenet, you can come closer to your dream of becoming a professional and profitable day trader, irrespective of the condition of the market.