How to Trade in a Bear Market in the UK?

As interest rates remain low and inflation stubbornly stays around zero, investors look towards other means to build wealth, such as investing in the stock market. When markets see rises following periods of stability or declines, it is often called a bull market. So when markets start seeing declines after a period of relative stability, we refer to this as a “bear” market, and it can be a challenging time for new.

In the last few years, we have seen a growing number of bear markets. The FTSE 100, for instance, has seen an 80% fall in value since its peak during May 2015 and is still yet to recover. This can be a worrying time for anyone who holds stocks and shares, especially if they are not experienced in dealing with such falls.

As in any market, it is possible to trade currencies using various strategies in a bear market. In the UK, following the Brexit vote and consequent uncertainty for this country’s future trading conditions, there have been calls from those opposed to leaving the EU for another referendum. This would cause further volatility and uncertainty. Until we know whether or not voters want to stay in Europe or leave, we can expect an extended period of trading with high volatility and low prices.

What to do in a bear market

Firstly, as is always advised when investing, you should spread your funds as widely as possible across different companies and sectors to not rely on one company’s performance. 

Furthermore, it is essential to monitor financial news headlines closely throughout the day to keep up-to-date with any significant changes that may affect markets. It might also be an idea to set up some price alerts that inform you before your stocks or shares move too far out of sync with their value relative to others in the same sector. 

Trading strategies to use in a bear market

Here are some trading strategies traders can use in a bear market.

Pairing Off

The first strategy you may wish to use is ‘pairing off’. With this approach, you find pairs moving opposite each other at different speeds and then place trades on both sides of the pair’s movement. You will need enough margin to allow for differences in rates and enough time to elapse while the lower-speed pair catches up to the higher-speed one.

Range Trading

A second strategy is ‘range trading’. This entails purchasing either a base currency or its counter at the same price, then waiting until it hits a pre-determined profit target before selling off that half of your position. You find other pairs moving closer together, then enter long positions on both sides of the movement. This increases risk but maximises profit potential. It’s advisable to have a large margin so you can wait for these movements to occur without being forced out prematurely due to margin call requirements.

Forex Carry Trade

The third strategy is ‘forex carry trade’. If you’ve done some research, you will already know that this involves borrowing in low-interest currencies to invest in higher-yielding ones. Of course, you can’t do it unless your broker allows for this. The disadvantage is that earnings are taxed as income rather than capital gains. For this reason, many prefer trading CFDs on shares or indices which capture much of the same market exposure but avoid the tax implications.

Finally

It is crucial to not panic in a bear market. It’s a common mistake that many investors make that when the value of their investments falls, they should sell up to cut their losses. Although this can be tempting, it can often prove costly in the long term if markets begin to recover. Before investing real money, beginner traders should use a reputable online broker like Saxo Bank. For more information on how to trade in a bear market, look at this site.