Bear Market Forex Trading: The Secret Of Surviving And Making A Profit

Last Updated July 23rd 2021
9 Min Read

Forex trading in a bear market is not like trading in a bull market. Prices are trending downwards, and it can be intimidating to get involved. 

But don’t be afraid, trading profitably in a bear market is possible, though you will likely have to change your trading strategy.

There are many definitions of what defines a bear market but, generally speaking, the accepted definition is if the market declines in value more than 20%.

Similarly, a bull market is defined when a market has increased in value more than 20%.

If you can survive a bear market, you can survive any market condition. It is often said, the best traders are made in bear markets.

In this article, we’ll look at what traders can do to survive and remain profitable in a bear market.

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How to trade in a bear market

In a bull market, it’s much easier to make money because you know that prices are on the rise. But there are many ways you can trade profitably in a bear market.

Diversify your portfolio

portfolio diversification

Don’t put all your eggs in one basket! This simple rule will make surviving a bear market much easier.

As a forex trader, diversification can mean getting involved in other currency pairs.

Look for pairs that offer more favourable conditions to trade. Of course, though, this means developing an understanding of how other forex pairs work.

It may be best to stick to majors and minors and avoid exotics.

You should also, look to hedge your trades. Trade forex pairs that usually counter one another; when one is down, usually the other is up or doing somewhat better.

This way you can make a profit either way or at least make a smaller loss.

Traders should think about trading with other market instruments as well, such as stocks for further diversification.

Spot forex pairs with real potential

In a bear market, all forex pairs can be on a downward spiral and look like they may never recover.

But that’s not the truth. Time will tell which pairs are struggling and which pairs will turn you a profit.

You must learn which pairs are not worth trading and which have the potential to make you a profit.

When you work out which pairs are doing bad and which pairs should be doing much better, you can see what pairs are worth trading.

You need to look for signs that the market is undervalued and soon will change.

A key thing to look for is events that are likely to take place soon.

Once you have figured out which pair will likely recover soon, buy and stay confident that it will turn around soon.

When the forex pair recovers, you will be able to sell/close your position at a good price having bought it undervalued.

Learn to place your value on a forex pair. Don’t take it wholly for its current market value.

In a bear market, currencies that are doing particularly bad go down much more than those that are not.

Buy the dip and sell the rips

Perhaps the most obvious way to make money in a bear market is to buy when the market is close to the lowest price and sell when the price momentarily rises.

This is risky to do because it is highly likely that the market will continue to decline in price.

What you should look for is confirmation that the price will momentarily rise. This will usually take the form of a short bullish candle.

You should set yourself a target of when to get out of the trade. To do this, you should look at past momentary price rejections and see how many pips they usually manage.

In a bear market, most often many of the candles will be bearish, but not huge. 

To trade the dips, you should look for two or more large bearish candles which are followed by a bullish candle. 

Usually, when this happens, traders see the large dip and believe the market may be about to turn around or see a potential rip appearing.

In most cases though, their buying causes the rip and then other people try to get on top of that action.

Before getting involved in the market, you should know your risk-reward ratio and have a risk management plan set out.

Traders should also look to short big winners up for the wrong reasons

By this we mean, currencies that shouldn’t be so high and will likely go down very soon. Make as much profit from them as you can.

Make sure you use a stop loss! 

Ideally, place it around where you entered the market and so if it is needed, you can exit the market at roughly the same price as when you entered, mitigating a loss.

You can also attempt to use a trailing stop loss.

Indicators and patterns

indicators and price patterns

To trade dips and rips in a bear market, you should also have useful indicators to hand and a good grasp of useful trends as well as how trends work.

Many of them will help you look for when a trend is about to reverse or point out moments where a trend will temporarily change.

One example of this is double tops and double bottoms. 

Double tops usually signify the beginning of a bear market while double bottoms usually signify the beginning of a bull market.

A key thing to remember is that many trading patterns that work in a bull market, work in the reverse in a bear market.

Another useful way to trade in a bear market is by using the SMA (slow moving average). Every time two averages cross each other can be seen as a sign to buy or sell a forex pair.

Make sure you have a couple of useful indicators to hand when trading in a bear market.

Time frames matter

If you are looking at short time frames, you will not see the bigger picture. A bear market can last a long time and short time frames may not make that visible.

By looking at larger time frames you will be able to see the real situation in the market and if it is likely to change at any time soon.


What to look for in a bear economy

bear market

When an economy is doing badly, fewer people buy machinery and other large purchases. Economies that rely on these kinds of exports will likely decline in market strength.

Other economies that produce things people need, such as food, on the other hand, will likely start performing better.

Eventually, the market will turn around and pick up the pace again. You need to stay patient and wait it out.

Always look for signs that the economy may pick up again.

Bear markets will sometimes take place after a big bull run. Remember that the market moves in cycles.

If the market reaches a particularly high point, many people will be looking to sell, and a selling frenzy may start which can plummet the price of a currency.

Have a value checklist

Create a list of all the things a currency needs to have to spot if it has a value to trade. Some key things this should include:

  • How well has the currency done in the past?
  • How active is the currency’s country in stimulating the price of the currency?
  • What key events are likely to happen soon that will increase the price?


Trade with the right mentality

You need to mentally accept that trading in a bear market is not the same as trading in a bull market. 

Traders may find that fear takes more control than other emotions because they know that the market is trending downwards.

See also: Top 10 Books On Forex Trading Psychology


Some of the most famous trades take place before bear markets

Before bear markets form, forex traders can make a lot of money.

One of the most famous cases is that of Andy Krieger who managed to make $300 million for the Bankers Trust in 1987 during Black Monday. He did this by shorting the Kiwi (New Zealand dollar).

Another famous example is George Soros who shorted the British pound in 1992 and forever became known as ‘the man who broke the Bank of England’.

Often the best trade is no trade

Remember, the best traders don't trade more, they trade less. If the market looks too volatile or too bearish, skip trading.

The most important thing to do when trading is to survive. Don’t take risks you are not able to take.

Swing trading strategies may work better than day trading strategies. Be patient, eventually, things will pay off.

However, this does depend on what kind of trader you are. Swing trading strategies may not appeal to all traders.

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Key points

If you remember anything from this article, make it these key points.

  • Build a diverse portfolio. Trade a wider variety of forex pairs and learn to hedge your trades. Also, look at different market instruments.
  • Learn to place your value in a forex pair. While all pairs will be going down, some will be doing better than others, these are the pairs you should watch.
  • Buy the dip and sell the rip. Learn to spot moments where the price will momentarily rise and quickly sell.
  • Sometimes it’s best not to trade at all. Trading is about surviving, the best traders trade less, not more, you need to protect what you have.

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