In Essential Bear Market Trading Methods, Part 1, we discussed the advantages of upgrading your technical analysis skills and improving your position management.

In this installment, we examine how changing your holding period, as well as your asset class and financial instrument, are also helpful approaches when navigating a bear market. 

Bear markets can be stressful, but keep in mind that something that looks like a crisis can also be an opportunity. Rather than dwelling on all the down arrows and minus signs, use the occasion to study up and enhance your trading talents. This way you have a fighting chance when it comes to battling the declines, and, perhaps, if things play out right, you might even find your fortunes changing for the better.

Let’s look at how experimenting with some changes in your trading methods may help your odds.

Change Your Holding Period

Generally speaking, market exposure means how much of your investable cash is vulnerable to the risks of particular markets or financial instruments. If you are only trading cryptocurrencies, then your market exposure is 100% on cryptocurrencies and you are fully exposed to the market risks involved with this particular asset class. If you change the frequency or holding period of how long you are staying in trades, you can reduce your risk of being exposed to market volatility or adverse price actions, which are typical for a bear market. 

According to an analysis by First Trust Advisors based on data from Bloomberg, there have been 14 bear markets in TradFi between 1947 and 2022, ranging in length from one month to 1.7 years. The crypto market is much younger and has had only four bear markets, with an average length of 306 days, and declines ranging from 40 – 84%. So you either sweat during the bear market and hold it out, or you limit your exposure by being in and out of trades faster.

To help you make a choice between holding periods, here’s an overview of common holding periods amongst traders and investors:

• HODL: Months to Years
• Mid to Long-Term Investing: Weeks to Months
• Position Trading: Days to Weeks
• Swing Trading: Hours to Days
• Day Trading: Minutes to Hours
• High-Frequency Trading: Nanoseconds to Minutes

The main difference between traders and investors is how long they hold a particular asset. Investors typically hold assets over longer periods of time compared to traders. Let’s look at these holding periods in more detail. 

HODL, a term which originated when someone misspelled ‘HOLD” on social media, became common advice amongst crypto traders: hold a trade longer and do not panic-sell during a market’s commonly-seen volatile periods. If you find yourself in a situation where you can’t handle the rapidly changing market conditions of a bear market, do yourself a favor and don’t sell until you are in the green again. If the current bear is like the previous ones, the most you’ll have to wait is another 305 days. (Disclaimer: HODL’ing is not advisable in collapse scenarios that can potentially drop to zero value, such as in the case of Terra Luna)

If you have been able to master the art of HODL’ing, you are now ready to venture into Mid to Long-Term Investing, and can take a punch at holding trades over weeks to months. This approach is best-suited for long-term investors who are familiar with portfolio management and rebalancing, and can’t wait another 305 days to return to the greenlands. Similar to portfolio management, you can calculate your risk-reward ratio and asset allocation on investments based on longer holding periods, in this case, the aforementioned several weeks to months. 

Since it’s hard to find projects that will show a consistent return during bear markets, and crypto markets are inherently hype-driven, make sure there is enough buzz around a coin if you are willing to take the risk of holding it for such a long time period. Shorting, small caps, and newly-launched projects might fit you best.

Since bear markets are well-known for their aggressive volatility, holding an asset for a longer time period might not always be the best choice. Understanding Position Trading will put you amongst the ranks of traders, rather than investors. You will find yourself now keeping an eye on market news and price action more frequently, since your holding period has now changed to days and weeks. 

Position traders are trend followers. They identify a trend – and an investment that will benefit from it – and ride it until the trend peaks. Solid fundamental analysis of an asset, a balanced entry and exit strategy, as well as good risk management are recommended for position traders in bear markets.

Swing Trading, according to Investopedia, is a “trading technique, generally associated with technical analysis, in which the trader seeks to profit from short-term price swings.” Although experts often argue about the average holding period necessary to be considered a swing trade(r), for the sake of simplicity we’re defining it here as a time period ranging from hours to days. In crypto trading it’s probably the most common time frame. This is because most traders are part-timers since they are unable to commit more than an hour per day, or a few hours per week, to trading and market analysis. 

Swing traders identify where a coin’s price is likely to move next. Then they enter a position, and capture the profit once that move materializes. Technical analysis becomes more of a focus for swing traders, as they have to identify short-term trends by analyzing patterns overserved on hourly to daily time frames. (Check our section on technical analysis in our first post on bear market trading methods  to refresh your memory.)

Now, Day Trading (also known as Intra-day Trading) is the master discipline amongst traders. It takes a lot of skill and practice to become consistently profitable as only 3% of day traders make money. With an average holding period of minutes to hours, you are in and out of trades multiple times a day. It’s pretty much a full-time job, and only makes sense to consider if you have turned a consistent profit over the aforementioned holding periods. 

Trading in shorter time frames also opens the door to new strategies, such as scalping (making money from small price swings), arbitrage (taking advantage of small price discrepancies across exchanges), range-based trading (identifying support and resistance zones in price movement and then trading depending on what happens in this range), and news-based trading (making your moves based on news and how the market reacts to that news).

In this kind of trading, you are solely focused on technical analysis, have risen to expert-level risk management, and use a range of trading tools and platforms to automate your trading workflow. You are half-machine, half-human. Now you are prepared to deal with any market cycle.

Once you are ready to leave the world of what’s humanly possible, High-frequency Trading (HFT) is the next step in your evolution. Besides HODL’ing and Day Trading, HFT is most likely the best approach to handle a bear market, but by far also the most resource and time intensive to achieve. 

HFT is a universe of emotionless algorithms, mathematics, statistics, high-performance computing, low-latency optimization, and market microstructures for traders who take the leap into the sub-minute latency game of trading. HFT is the most competitive industry on Wall Street, and the Wall Street quants and trading system engineers who bring the necessary qualifications can earn easily north of $400k a year (before bonuses).

When changing your trade frequency, be aware that your new holding period has new challenges to master. Long-term investors switching to shorter time frames have to get accustomed to spending more time on market analysis, risk management, and learning about new trading strategies suitable for the particular time frame they have chosen. So, make sure to keep that in mind when switching lanes.

Change the Asset Class or Financial Instrument

We have explored how to lower market exposure by changing the amount of time you are exposed to an asset class. Now we are going to look at how to lower market exposure by changing the asset class or financial instrument.

Historically, institutions and larger investors have aimed to reduce risk during bear markets by diminishing the exposure to asset classes considered volatile and risky. Now, crypto is currently seen amongst TradFi investors as a full-on risk asset class. You, as a crypto trader, however, may know every trick in the book after dealing with crypto risk, be it weathering price declines of up to 84%, seeing the ups and downs of daily market volatility of 20% (and with altcoins even more), and battling sleep deprivation with crypto markets trading 24/7. Therefore your risk tolerance by now should be slightly higher than that of the average investor.

Even so, taking a page from the TradFi book on how to deal with difficult market periods might not be a bad idea. With the current dollar strength at the time of this writing, reducing your exposure to crypto assets by holding fiat/stablecoins might be contrary to your ideals of supporting the future of decentralization and democratization, but for reducing portfolio risk and saving capital for new investment opportunities, it’s an approach worth considering. 

Similarly, if you have been mostly trading altcoins, simply switching to less volatile cryptocurrencies can help you reduce risk as well, and still stay loyal to your crypto ideals. Average volatility in altcoin markets have been often observed to be almost twice as high as Bitcoin, with Ether coming next in line as a less volatile cryptocurrency. 

Keeping in mind what the big market players are doing helps to understand this dynamic as well. 

Institutions de-risk during bear markets, and altcoins are considered higher risk compared to Bitcoin and Ether, as they haven’t been around for as long as the two major crypto assets. If you think in particular about institutional access to crypto assets, most investment products in TradFi only allow exposure to trade Bitcoin and Ether (Grayscale Fund, CME Futures, Crypto ETFs), and with institutional adoption only having started in 2020, it’s not far off to assume that altcoins are the first ones to ditch when the bear market kicks in.

A controversial, but worthwhile approach to consider when trading different assets to reduce risk can also be to trade different currency pairs altogether. Bitcoin and altcoin pairs or altcoin and altcoin pairs like BTC/ETH or ETH/SOL might not be as affected by volatility during a bear market as cryptocurrency and stablecoin pairs. The added benefit is here, again, you can stay loyal to your crypto ideals.

Just as you can change the type of assets you trade, you can also reduce risk by changing trading product or financial instrument. Moving from coin-margined futures to stablecoin-margined futures already helps you to reduce risk, as the settlement asset is now a stablecoin and less volatile in contrast to crypto assets. 

In our third installment, we will explore taking a deep dive into fundamental analysis, as well as several new trading strategies.  

Meanwhile, remember that a bear market doesn’t have to make you apprehensive. If you study the methods discussed in these posts, you have the potential to steer clear of unnecessary losses. 

However, always be sure to Do Your Own Research (DYOR) before engaging in any investment activity or trading.  

Best of luck and enjoy the ride!