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When the market starts to fall, some investors start to panic. But there are so many ways to take advantage of bear markets that there is no need to be afraid. Keep calm and learn how to trade falling prices.

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A bear market is commonly used to describe a down market. But specifically, it is a market that is down 20% or more compared to the previous hh, and it lasts for a long time (usually two or more months). This occurs when the number of sellers exceeds the number of buyers, resulting in pessimistic market sentiment.

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This usually refers to the overall market or index, but individual stocks or commodities can also be said to be in a bear market.

To avoid confusion between a bear market and other downward price movements, we’ve looked at four types of bear markets and how they differ from a bear market. These are:

Another term that traders who are interested in the decline should be aware of is the “bottom”. A market low is the lowest price a security has traded at during a given period of time, whether it is a day, month or year. This is considered an important point of interest as it can be a good entry point for buyers or a reference point for support levels.

When a market crash, bear market, or even a more temporary recession begins, it’s important not to panic and follow the herd. While these downward price swings have a negative impact on portfolios, the extent to which you are exposed to risk will depend entirely on your goals as a trader or investor.

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Buy-and-hold investors don’t necessarily have to fear market downturns because you’re interested in the long-term trajectory of the stock market. Bear markets tend to be significantly shorter than bull markets, so the stock market is generally higher. For example, the FTSE 100 could drop almost 4,000 points and still be at a higher level than it was 20 years ago, despite two bear markets. However, as we’ll go through in a moment, the downside risks will depend entirely on the method you use to invest in them.

Some investors who want to gauge the impact of this short-term market decline may choose to hedge their stock portfolio. However, this strategy depends on risk appetite and available capital, as it involves opening multiple positions.

For traders, bear and bear markets offer great profit opportunities as derivatives will allow you to speculate on rising and falling markets. With derivatives, you can open a security position without having to own the underlying asset.

There are various ways that both investors and traders can profit from market downturns or at least protect their existing funds from unnecessary losses. These include:

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Perhaps the most common way to profit when the market is down is to sell short. There are different ways an individual can short sell, depending on the market you want to trade and the product you want to use.

The traditional method involves borrowing a stock (or other asset) from a broker and selling it at the current market price. If the market is in a long period of decline, you can later buy back the shares at a lower price. You would then return the shares to the lender and take home the price difference as profit.

However, if you were wrong and the market started to rise again – meaning the decline was just a retracement – ​​you would have to buy back the stock at its market price. It’s worth noting that short selling has the potential for unlimited losses, as there is no theoretical limit to how much the market can go up.

Short selling is the main function of derivatives trading – these products are purely speculative and their price is based on the market price. Derivatives do not require the trader to own the relevant shares or assets.

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When you trade CFDs or spreads, you will always have the option to go long or short, so you can take advantage of falling as well as rising markets.

With a spread bet, you place a bet in the direction in which the price of a particular asset is moving. If you open a short position, your profit depends on the price falling, providing the same outcome as a traditional short sale position. When you trade CFDs, you buy a contract to exchange the difference between the opening and closing price of an asset, in this case a share. You would open a position to “sell” the CFD.

While we focus primarily on bear markets in equities, short selling also applies to many other markets, including currencies and cryptocurrencies.

A short exchange traded fund (ETF) or inverse ETF is designed to profit when the underlying benchmark declines. They consist of various derivative products, mainly futures contracts.

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This is similar to shorting a security, except that instead of borrowing to sell the asset, you are buying the market. Thus, inverse ETFs allow investors to profit in a down market without selling anything short.

For example, if you expected the FTSE 100 to fall in value, you could invest in a short FTSE 100 ETF. If the UK benchmark fell, the short ETF would rise.

Inverse ETFs are often not considered long-term investment vehicles because the derivatives they are based on will be bought and sold daily by the fund manager, meaning there is no guarantee of its performance. Instead, investors typically use them to protect their stock portfolio against short-term declines.

Short ETFs are considered a less risky alternative to traditional short selling because the maximum loss is the amount you have invested in the ETF.

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For traders, speculating short ETFs remains a viable method of profiting from market downturns because, like investors, they simply choose to “buy” the market. However, traders can simply take a short position in a conventional ETF. There is not the same need to rely solely on inverse ETFs.

A safe asset is a financial instrument that typically maintains its value or even increases in value while the broader market declines. These assets are negatively correlated with the economy, meaning investors and traders often use them as a refuge during market downturns.

In theory, you would take a long safe haven position to prepare for a market downturn. It is considered an alternative to closing or shorting a position because it allows you to secure any existing holdings.

Common examples of safe haven assets include gold, government bonds, the US dollar, the Japanese yen and the Swiss franc. However, it is important for investors and traders to remember that just because an asset is traditionally considered a safe haven, it does not guarantee that it will perform as such in every market downturn.

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If we take the example of gold to invest in safe haven assets, you would want to buy the physical precious metal as a store of value. However, if you just wanted to speculate on the value of safe havens, you can use derivatives so you don’t have to accept the property itself.

There are currencies that are commonly used as a safe haven during financial downturns, but this is only one way to use the forex market as a hedge against market downturns.

A national currency is dependent on the state of the domestic economy, meaning that any perceived downturn in the economy will generally affect the price of the currency. If an economy is considered weaker than other world economies, its currency will depreciate against other world currencies. For example, during the Brexit negotiations, the political turmoil and instability affected the attraction of investment in the UK. The FTSE 100 and the British pound were volatile.

Traders can take a position

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