What is a Bear Market?

What is a Bear Market?

A bear market is a financial market that is experiencing a long-term drop in asset prices. Usually bear markets will develop when the economy is entering into a recession, inflation is on the rise or when unemployment is increasing. This causes investors to lose confidence in the market and in turn that causes market prices to drop. You should remember that a long-term bear market will occur from time to time but overall the market has increased more than it has decreased.

Putting a Bear Market into Perspective

A bear market is typically characterized by a 20% decrease in the S&P 500, NASDAQ and Dow Jones Industrial if we stick to the rigid definition. According to data dating back to the year 1926, a bear market lasts an average of 1.3 years and it does not drop the entire time. There is usually a decline between 10% and 20% followed by a bullish upward trend. During this period, there is a lot of negative market sentiment and many investors choose not to invest in the market until it starts showing signs of improvement. Most of the negative sentiment felt during a bear market is based on fear. This has the effect of further depressing market prices.

Prices in a bear market drop and the price of assets such as currencies, stocks and indices are not as buoyant as they are under other types of market conditions. Equities traders are partial to market corrections and short-term bear markets as there are many deals to be had. However, you should have an idea of when you believe the market will bottom out so you do not lose money on your investment. In binary options trading, there are only two potential outcomes but you can generate a profit no matter which way the market is moving. For a bear market, you should usually opt for a put option and when the market is rising you will generally want to stick with a call option.

Corrections vs. Bear Market

The market regularly experiences volatility and trends but these are markedly different from a bear (or bull) market. Corrections are temporary and the decline is much less significant than a bear market. Corrections happen all the time and they are part of normal movements in the market. Carter Worth recently wrote an article called Money in Motion which stated that since 1927, there have been 209 corrections of 5% or more. If you take the math further, this means that there have been 2.47 corrections every year for the last 18 years. The fact of the matter is that corrections happen frequently and it is a characteristic of the market that every investor will deal with. At the same time, just because there is a correction does not necessarily mean a bear market is coming.
Corrections will occur and it will be financially and emotionally difficult for investors because it is hard to deal with continuous price decreases in the market. You must remember that trading emotionally can cause you to make poor decisions and make the situation worse. With binary options you can take advantage of changes in the market. Even if one trade finishes out of the money you can make up for it on another trade.
There are always trading opportunities – regardless of what the market is doing – so it is vital to stay calm and analyze the market before you make any crucial trading decisions. You can still make long-term investments. Remember that corrections tend to be short-term and you will want to focus the bulk of your efforts on short-term trades based on the corrections that are happening in the market.

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