Recently, people have been asking me how to identify a bear market. Actually, that’s a great question. Many people’s understanding of a bear market is still stuck at the level of “stocks are falling,” but a real bear market is far more complex than that.

Let’s start with the definition. A bear market generally refers to a decline of more than 20% from a peak price. This standard applies not only to stocks—bonds, precious metals, and cryptocurrencies all count. For example, in the U.S. stock market, the Dow Jones Index fell from 36,952.65 in January 2022 to 29,260.81 in September, officially entering a bear market. Conversely, a rise of more than 20% from a low point is considered a bull market.

If you ask where the name “bear market” comes from, it’s actually quite interesting. In the 17th century, hunters would sell the bear skins before they even caught the bear, and then deliver them after the bear was caught. Later, this logic was applied to the stock market. Traders would borrow stocks to sell them first, and then buy them back later after prices fell in order to profit. That’s the principle behind making money in a bear market.

So how do you tell when a bear market has truly arrived? I’ve summarized a few signals. First, of course, is that the price drops by more than 20% from the high point—this is the basic definition. Second, the average duration of a bear market cycle is about 367 days. In the S&P 500’s 140-year history, there have been 19 bear markets with an average decline of 37.3%, lasting about 289 days. But there are exceptions. The bear market in 2020 lasted only 1 month—it fell from the high on February 12 to the low on March 23, then rebounded by 20% on March 26 and broke away from the bear market.

The third signal is changes in economic conditions. Bear markets are usually accompanied by an economic recession, rising unemployment, and deflation. Another factor is that there are too many asset bubbles—when prices are pushed so high that nobody wants to take the next position, the stampede effect accelerates the decline.

Why do bear markets happen? I think there are mainly two reasons. First, market confidence collapses. People worry about future economic conditions, consumers hold back, companies reduce hiring, and the capital markets can’t see any growth opportunities—three things happen at once, and stock prices plunge. Second, the price bubble is too severe. When asset prices stray too far from fundamentals, the market will adjust sooner or later. These two factors are usually a chain reaction that occurs simultaneously.

Take a look at several major bear markets in history to see how this plays out. The 2008 financial crisis began in October 2007. The Dow fell from 14,164 to 6,544, a decline of 53.4%. That was due to the subprime mortgage crisis: banks packaged bad loans into financial products and sold them everywhere. After housing prices rose to absurd levels, once interest rates were raised, the whole chain broke. It wasn’t until 2013 that the market recovered to the 2007 peak. The dot-com bubble in 2000 was similar: a bunch of unprofitable high-tech companies were hyped to the sky, and in the end, everything collapsed. Black Monday in 1987 saw the Dow plunge 22.62% in a single day. That time it was caused by the chain reaction of algorithmic trading.

The recent 2022 bear market was mainly caused by global central banks flooding the market with liquidity after the pandemic, which led to inflation surging, along with the Russia-Ukraine war pushing up commodity prices. The U.S. Federal Reserve was forced to raise interest rates sharply and reduce its balance sheet. At this time, market confidence dropped in a straight line, and the electronic stocks that had risen the most in the prior two years fell the hardest.

So what should you do when a bear market arrives? I have a few ideas. First, keep enough cash, reduce leverage, and cut back on stock holdings with a “too good to be true” outlook and those with high price-to-earnings ratios. These kinds of stocks tend to rise sharply in bull markets, but they fall much more in bear markets. Second, if you still want to invest, you can focus on some recession-resistant sectors, such as healthcare, or on high-quality stocks that have fallen hard but have real competitive strengths. The key is to have enough of a moat to get through the economic downturn. Third, you can consider certain financial instruments—for example, short selling—to find opportunities during periods of decline.

There’s also an easy trap to fall into called a bear market rebound. It refers to a sudden rally lasting a few days or a few weeks within a downtrend. Many people will think the bear market has ended, but it hasn’t. Unless the market rises by more than 20% to officially move out of the bear market, or keeps rising for several consecutive months, it’s still just a rebound. To judge whether it’s a real bear market rebound, you can look at whether 90% of stocks are trading above their 10-day moving averages, or whether more than 55% of stocks are making new highs within 20 days—these are both rebound signals.

In the end, bear markets aren’t scary. The key is to recognize them early and use the right tools. For conservative investors, what bear markets test the most is patience and discipline—cut losses when you should, and take profits when you should. There are opportunities for both bulls and bears; it all depends on how you seize them.