Bear strategy, pros and cons

What is market bears?

For the stock funds bears are selling investors. They believe that market is headed downward and do their best to keep it falling. What’s the etymology? As for the wild nature, bears typically hit their victim down with theirs paws. These traders do the same with, – they keep profit from a decline in stock prices.

Bears strategies are based on loss of investor confidence, increase of pessimism in the markets economy or markets. It’s regularly joined by by things like rising inflation, high unemployment, or a coming recession.

  • Paul Tudor Jones has made over 100M$ shorting the US equity market just ahead of the October’87 crash.
  • Andy Krieger has made about 300M$ short-selling the New Zealand dollar.
  • Jim Chanos has made 500M$ from short-selling Enron in late-2000.
  • George Soros has made 1BN$ betting against Sterling in 1992.
  • John Paulson has made 4BN$ shorting the US subprime mortgage market in 2007.

 

As for forex market, bears usually keep an eye on the currency fall and do everything in order to keep it going down

Not everything may be legal. The huge part of the trick is psychological ones, – they fool market with fake rumours.

Let's see an example?

  • At first bears actively sell papers at the very attractive price
  • Thus they create an agiotage at sellers crowd
  • Market participants notice price growth and get rid of the same shares in large quantities. As a result of quotation decrease, the price falls (the market is flooded with this company shares and value decreases)
  • As soon as the price falls to profitable level, bears acquire shares at the much more lower than initial cost

Bear market features

The certain attribute is gradual reduction of price during selected time period. Main trends are directed to down.

Unexperienced traders expect market to be good only in case it grows. So bear market usually is considered to be bad. The bulk of traders try to buy in the long term to gain income from the growth of quotations.

But if demand outweighs the offer — there are not enough shares any more to fullfill everyones will to purchase, market trend changes, and bear market turns into bull cos starts to grow.

Bear trend

At the chart it looks like a descending line. It shows that the price falls continuously. If market follows the bear trend, the trend line need correction. Not always the breakdown of the line means soon trend turnback — to a thicket it comes to line correction.

Rules to keep

  1. There’s a signal for  purchase at a breakdown of the bearish trend line. The minimum quantity of closings in day behind the trend line is established or the minimum percent of the change in price is fixed to confirm breakdown
  2. Each rise in the price which approaches the line of a bearish trend it is the quite good moment to open a position in the direction of the main current trend
  3. The top line of bull trend corridor in total from bear form a zone of possible investors profit, if trade is based on short-term fluctuations

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