Bear Market
Definition
A bear market is a sustained decline of 20% or more in a major stock index from recent highs — characterized by falling prices, deteriorating economic conditions, rising fear and uncertainty, and a dominant bias toward short positions, cash, or defensive assets.
Example
“The S&P had fallen 28% peak-to-trough over six months — officially a bear market. Every long setup I tried failed within two days. I adjusted: tighter position sizes, shorter holds, and started focusing on short setups instead of fighting the trend.”
Detailed Explanation
Bear markets are the hardest environment for most retail traders because the majority are trained to buy. The natural human reaction to seeing lower prices is to view them as bargains — but in a bear market, lower prices are often just a stop on the way to even lower prices. The same patterns that produced winners in a bull market produce losers in a bear market: breakouts fail, pullbacks become sustained downtrends, and "cheap" stocks keep getting cheaper. Adapting to a bear market requires a fundamental shift in bias, strategy selection, and sizing — not a stubborn continuation of what worked when prices were rising.
Bear markets are not linear — they're characterized by sharp, violent bear market rallies that can recover 10-15% in days and create the illusion that the bottom is in. These rallies are often the most dangerous moments for traders because they draw in buyers who think the trend has reversed. The pattern typically is: sharp rally, failure at resistance (often the prior breakdown level or a major moving average), then resumption of the downtrend. Experienced traders either short these rallies at resistance or stay in cash rather than trading counter to the dominant trend. "Don't catch a falling knife" applies to bear market rallies just as much as to individual stock breakdowns.
For day traders, bear markets actually create excellent short-side opportunities. Stocks in downtrends make lower highs on dead-cat bounces, providing clean short entries with defined risk above the bounce high and targets at prior support levels or measured moves lower. Sectors that led in the prior bull market (typically growth, technology, speculative names) tend to fall hardest in bear markets as their high valuations compress most severely. The key adjustment is conviction to hold short positions longer than feels comfortable — bear market declines tend to be faster and more sustained than bull market advances, and shorts that work tend to work hard.