A bear market can be a frightening and confusing experience. Images of vast sell-offs, plummeting prices, and panicked investors come to mind. All those red candles can be disheartening, and it can be difficult to stay positive when the market seems to be against you. 

But don’t panic! 

A bear market is not the end of the world. In fact, it can be an opportunity to learn and improve your trading skills. Over the course of several posts, we will share methods that will help you battle the bears in a declining market, and maybe even come out ahead.

Upgrade Your Technical Analysis Skills 

Improving your skills when it comes to market analysis can help you to identify new investment opportunities, improve your risk management, and spot the general direction the market is currently trending in. There is technical analysis, and then there is fundamental analysis. In this section we will show you four types of technical analysis.

On-chain analysis, for example, gets you insights into what’s happening within a blockchain network. Blockchains like Bitcoin, Ethereum, or Solana have their own separate networks, which you can analyze in different ways. You can look at utilization, transactional activity, and the distribution of assets on a blockchain. Typical metrics to look at are active wallets, transaction volume, whale movements, miner and exchange inflows or outflows, smart contract interactions, as well as realized and unrealized profit or loss of network participants.

Derivatives data gives you a clearer picture of the sentiment in the market. By looking at data points like open interest, funding rates, and liquidations, you can get a sense of how much risk investors are currently taking, which market direction traders are tending towards, and how much loss traders had to take due to liquidations.

Order book/market microstructure analysis provides you with insights into market momentum and sentiment. While market microstructure analysis is more about looking at how a particular exchange and market works, order book analysis helps you to understand the current market activity of a specific trading pair. Traders usually look at trading volume, bid-ask spread, and order book depth to get a sense of current market structure and activity, while looking at order flow allows you to identify buy and sell pressure.

Market sentiment data is about investors’ broader emotional perception towards the general market or a specific asset. To get a sense of the general tone, fear, and hype relative to an asset, you can analyze social media channels, industry news, activity on niche forums, and Google Search. Specific data points to keep an eye on are social engagement, spam volume, unique mentionings of a cryptocurrency, overall sentiment (bullish/bearish), developer activity on GitHub, and Google Search volume.

Improve Your Position Management

With position management you can improve your risk management of positions across different assets and build a coherent entry and exit strategy. In this section we check out different ways to do that.

Market timing, an often misunderstood concept, is a good strategy when used correctly. By coming up with a plan that allows you to calculate reward and risk levels prior to entering or exiting a trade, you can then use those levels as a blueprint to enter/exit the position at the best price, whether you’re at profit or loss.

Timing your entries better when entering a position can entail a number of approaches:

Dollar Cost Averaging (DCA) is investing small amounts at different lower prices. This helps you to lower your average overall buy cost throughout a bear market so you can position yourself properly, and it lets you stretch out your funds over a longer period of time. You can also use this approach to buy several financial assets simultaneously so as to balance out any individual asset’s volatility. 

“Buying the dip” is a technique in which you buy up a coin when the market has a big negative decline, also called a “correction.” You are essentially taking advantage of the bear market’s falling prices, so that you may profit from the upside if and when prices go up again.

Support and resistance levels are predetermined price levels of an asset at which the price will tend to stop and reverse. These levels are met when multiple touches of a price have happened without a breakthrough of the level. Support levels are good entries for long positions and resistance levels are good entries for short positions.

The following approaches can help you to time your exits better when exiting a position:

All of the above methods listed under “timing your entries better,” but in a reversed approach. DCA, which in itself is a scaling method, can be used at a shorter time frame to average your exit price at different price levels, which, in this case, would be called a trailing stop. In a move opposite to “buying the dip,” you can exit your long position after a huge breakout of price action. And, support and resistance levels can be used to identify existing levels for your take-profit or stop-loss orders.

Stop-loss and take-profit orders close your long or short position for a profit or loss when prices reach a certain risk or profit level that you have set yourself before entering the trade. Take-profit orders are implemented to close your trade when prices reach an anticipated profit-level. Stop-loss orders are carried out to close your trade when the markets take an unexpected turn and you want to limit your losses.

If you are more advanced, you can use technical indicators to help you time your exit. Popular indicators are Moving Averages, Bollinger Bands, MACD, and even custom-built indicators based on data points mentioned in the previous section. 

Simply reducing leverage is also an often-recommended approach in a bear market. There are two ways in how that approach can be best applied. Reducing your leverage in an existing position will lower your liquidation price and risk levels. Comparatively, you can look at your historical average leverage levels you are trading at and lower them going forward, which will have the same effect of lowering the risk of each trade.

Improving your position sizing helps you avoid devoting too much cash to losing trades and allocating too little capital to winning ones since your position size is what lets you determine the maximum amount of money invested in a single trade. It also helps you to figure out how many assets you can buy while staying within risk parameters to maximize profits. Additionally, proper position sizing helps to manage portfolio risk and protects many new traders from substantial losses. The rule of thumb is not to use more than 5% of your investable cash per trade.

In our second installment, we will discuss other methods, such as changing your exposure to the market, changing asset class or financial instrument, taking a deep dive into fundamental analysis, and learning new trading strategies.

Until then, remember: you don’t have to be nervous during a downturn in the market or a bearish trend. With the methods discussed above, and the ones coming in the second part of this series, you can stay active and avoid unnecessary loses. But don’t forget to Do Your Own Research (DYOR) before engaging in any trading or investment activity.

Good luck, and happy trading!