How To Define Who Is A Bear In Trading

A trader or investor who believes the price of an asset, sector, industry group, or the market, in general, will decrease in value is known as a bear. A bear in trading terms seeks to profit from a contraction in prices and stands opposite of a bull who believes price action will increase. Traders can answer the "who is bear" question by evaluating portfolios, as a bear will have an overweight in short positions, in line with the bias that price action will fall. Bearish traders often viewed as contrarians, make up a minority group of traders, accounting for approximately 10% to 15% of daily turnover in equity markets. 

How to Spot a Bear in Trading?

Despite the rarity of a bear in trading, related to the overall market, a bear is easy to spot based on a negative outlook on price action and associated short positions to profit from an expected sell-off. A bear in stock market trading is less frequent than in the Forex market, where prices fluctuate in smaller ranges, and liquidity and volatility are significantly higher. Therefore, sentiment and positions change frequently, offering a broader balance between bears and bulls.

Forex Bear Examples

Since a bear in trading Forex is more frequent, we will evaluate the bear in Forex meaning and show two examples. Given the volatility, liquidity, and rapid price action in Forex trading, traders frequently switch from bear to bull and vice versa, especially short-term traders. The primary definition of bear in trading applies as short-selling currency pairs dominates bearish portfolios. 
 
One difference between a bear in stock market trading versus Forex is that currency pairs consist of a base currency and a quote currency, allowing bears to buy a currency pair if they have a bearish view on the quote currency.

Here are two Forex bear examples:

1. Forex bear example with the base currency
 
A trader believes the Australian Dollar will fall in value
One way a bear can profit is by selling the AUD/USD currency pair
If the Australian Dollar corrects, it usually does against all quote currencies, but the degree of the sell-off can vary dependent on the quote currency
For example, the AUD/USD may not fall as much as the AUD/JPY
 
2. Forex bear example with the quote currency
 
An alternative trade to profit from a bearish outlook on the Australian Dollar is buying the EUR/AUD or any currency pair where the Australian Dollar is the quote currency

What is the Essence of a Bear?

A bearish sentiment applies to all asset classes and counters bullish sentiment. While bulls attempt to buy low and sell high, bears seek to sell high and buy low. Short selling is the primary approach, where a bear borrows an asset from a broker, then buys it in the open market once the price falls and earns the difference minus associated costs. Bears in equity markets are less frequent, as the long-term trend is bullish. Therefore, long-term bears, or perma-bears, constantly lose money. Smart money applies a bearish bias to portfolios for short-to-medium-term market conditions, as a bear market has a shorter duration than a bull market. 

What is Bearish Trading Behavior?

Bears have a negative price action outlook, but sophisticated traders manage long/short or bullish/bearish portfolios. It is unlikely for traders to have a bearish sentiment on each asset class. For example, traders may have a bearish outlook on US equities but a bullish view of Asian markets. Another example is a bearish view on the US Dollar and bullish sentiment on gold. Bears face unlimited downside risk as, theoretically, no limit exists to how far an asset can rally, while bulls know the limit is zero. Therefore, prudent risk management remains essential for bears. Another significant risk is a bear trap, which can cause massive losses and, on rare occasions, result in a liquidity event.

A bear trap in Forex example:

The price of the EUR/USD declines following a multi-week rally
Bears believe the correction will accelerate after three days of heavy selling and place short positions
Price action reverses direction, concluding a healthy bull market correction
The EUR/USD advances and exceeds its previous high before the sell-off, forcing bears to close their short positions by buying the EUR/USD to limit losses
The additional buy orders push the EUR/USD farther to the upside, but bulls must remain cautious, as a mean reversion may follow a successful bear trap

Bear Conclusion

Since markets rally and correct, bears have a profitable approach to navigating corrections. Adopting either a bull or a bear attitude is counterproductive, as traders can miss significant opportunities. Smart money operates long/short portfolios. They ensure diversification and create profitable opportunities irrelevant to a bull or bear market.

FAQs

Does Forex have a bear market?
The Forex market has the highest frequency of changes between a bull and a bear market due to its massive liquidity and volatility. Therefore, bears have the most trading opportunities in Forex versus other asset classes.
 
How do Bears make a profit?
Bears profit by entering short positions, generating profits when price action falls.
 
Should you buy in a bear market?
It depends on the conditions, but long-term traders who can handle volatility and floating losses of a bear market usually earn profits by buying into a bear market.
DailyForex.com Team
The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.

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