Strategies when Doing Forex Trading in Bear Markets
With the economic recession forcing people out of their homes, their jobs, and their businesses, many are looking for new ways to manage their finances and invest their money. While some have turned to stocks and bonds, others have explored the foreign exchange market. Daily turnovers of over $3 trillion prove that the forex market is one of the largest and most active financial markets in the world. If you are thinking of trading in the forex market, it’s important for you to understand the concept of the “bear market.” During these times of worldwide economic hardship, understanding the bear market concept can help you take advantage of the forex market and make some money.
What is a bear market?
In the most basic terms, “bear market” refers to a sharp decline in market prices. The term “bear market” is not only used in the forex market but is also used to describe similar conditions in the stock and bonds markets. In most cases, bear market conditions result in a widespread sentiment of pessimism among investors, because falling prices often equate to decreased investment returns. Still, there are cases in which investors can capitalize on bear markets and make income, despite the falling prices and pervading negative sentiments. Later on in the article, you will learn some tips and tricks for forex trading success in a bear market.
There are certain market conditions that are seen as indicators of a bear market. First, a market can only be considered a bear market when prices continue to fall for a prolonged period of time. In most cases, a market is only described as “bearish” when the continued decrease occurs for longer than two months. Any shorter than two months and the conditions are described as a “correction” instead of a “bear market”. Another indicating factor of a bear market is the amount by which the prices fall. In order to be considered a bear market, the prices must fall by at least 20% from the peak to the trough. With this information, it’s easy to see why bear markets are a common theme during times of recession.
One of the difficulties of a bear market is that investors have a hard time finding entry points into the market. Because the prices are often volatile, it’s difficult to predict when the prices will begin a steady increase again. Let’s say you want to get into forex trading and you are planning to trade the EURUSD. The US dollar is currently in a bear market trend, meaning that the value of the dollar is decreasing due to the recession. It will be difficult to find the best time when you should trade US dollars because the market is still in a downward trend. Some say it may take years for the US dollar to recover, while others predict that the Obama administration will soon put the US dollar on an upward trend.
How is forex trading done in a bear market?
When you get into forex trading, it is important to understand the concept of being in a zero-sum market. This basically means that, when the value of a specific currency decreases, the value of another currency will increase. In other words, when there is a bear market, there is also a bull market (a bull market is the opposite of a bear market in the sense that bull markets are indicated by upward trends). Despite the fact that one currency may be experiencing bearish trends, you can still make money on your investments by shifting your trading strategy.
To illustrate the idea of the forex market is a zero-sum market, let’s use a hypothetical example. Take the currency pair of the USDJPY, or the US dollar and the Japanese yen. Three months ago, the USDJPY was valued at 110, meaning one US dollar is equal to 110 yen. Let’s say that there has been a 25% decrease in the USDJPY market (a bear market trend), causing the value to drop to 82.50. Although the US dollar experienced a bear market trend and weakened, the yen experienced a bull market trend and strengthened. This is the idea of the zero-sum nature of the forex market. In other words, when you engage in forex trading, there may be bearish or bullish trends, but it all depends on which side of the coin you are.
Tips when trading in a bear market
The advice that forex analysts and experts give regarding bear markets varies. Some will say that if you are on the bear market side, you should try to cut your losses by selling off your investments in that particular bear market. On the other hand, some advisers will say that it may be wise to stick it out and wait for the bear trend to reverse into a bull trend. One of the best pieces of advice for those experiencing the bad end of the bear market, though, is to act like a bear in the winter by lying dormant until things start to turn upward. Basically, this means that you should try to pull out your investments, but watch for signs that the market is turning into your favor. You can then reinvest your money and capitalize on the bullish trends.
In the end, it all boils down to your own investment strategies. If you spend your time listening to all the advice from other people, you would probably go crazy and not know where to invest your money. Try to formulate your own trading strategy that makes sense to you, personally. You have to remember that you are investing your own money, so you should know exactly how you want to invest it. Always remember that, in the forex market, there are always two sides to the coin. If your current investment starts to slip into a bear market, then you may want to consider transferring your investment to a market that is experiencing better gains. If worse comes to worst, you can always stop the bleeding and pull out your investments to place them into your savings account. Just make sure that you don’t ride the bear for too long, or you may ride your investments into the troughs.