Bearish: a market mentality in which the investor believes prices will fall
Investors who adopt a bear approach sell (or short) securities under the assumption that they can buy them later at a lower price. Bears are pessimistic investors who are attempting to profit from the downward movement of stocks.
NOTE: When a bearish investor enters a trade, they are considered to be “going short”
How Bear Markets Begin
If you understand anything about how prices move, then you’ll know that a bear market is simply the self-fulfilling prophecy that occurs when people believe that prices will fall due to some outside catalyst. The Bearish traders will sell stocks on the assumption that prices will fall, and prices falling is a direct result of the bearish traders’ selling power.
This belief is then reinforced as the participants in the market continue to push the prices lower despite any negative information, which then validates their belief that prices should be falling.
Bear Traps
bearish investors must be aware of what is commonly known as a bear trap. A bear trap exists when an investor believes a sudden decrease in the value of a particular security is the beginning of a trend resulting in the investor going short. This can lead to a selling frenzy (panic selling!) where, as more investors sell the security, the price continues to fall. Once those interested in selling the security have completed the trades, selling pressure may drop and lead to spiking prices for the security, squeezing all of the shorts out as they realize that they were caught in a bear trap.
As the price rises, bearish investors must choose whether to hold or buy back the security. If investors begin to cover (buy back their shares), the price will continue to raise from new buying pressure. This may prompt a new round of investors to begin covering their holdings and driving the price up even further. In cases where a bear trap did exist, the price of the associated stock often does not return to that lower price (at least for the short term)
As a bearish trader, you are required to understand exactly how to navigate the ‘short’ side of the trade. This can be pretty difficult as demonstrated by the staggering statistic that over 90% of traders fail. One extremely important step to take as a trader is to learn and understand why these 90% of traders failed, and then avoid those mistakes. We break down these mistakes in this free trading workshop, so I suggest you sign up now and learn!
