Recently, I’ve noticed many people discussing bear markets, and I’ve found that quite a few still have a somewhat unclear understanding of what a bear market really means. Today, I want to organize it from my own perspective: what a bear market is, and how to respond to it.

In simple terms, a bear market is when stock prices fall more than 20% from their highs. This applies not only to stocks—bonds, precious metals, and cryptocurrencies are all affected too. But it’s important to note that a bear market is different from a market correction. A correction is only a short-term adjustment of 10–20%, while a bear market is that kind of sustained, systematic decline lasting several months or even years.

You can feel the impact of bear markets by looking at historical data. Over the past 140 years, the S&P 500 has gone through 19 bear markets, with an average decline of 37.3% and an average duration of about 289 days. In the most recent bear markets, the 2008 financial crisis fell by 53.4%, and it wasn’t until 2013 that it recovered to the 2007 high. The one in 2022 was also quite harsh, mainly driven by the Fed’s aggressive rate hikes along with the impact of the Russia-Ukraine war.

So, what usually comes with a bear market? Economic recession, rising unemployment, and inflationary pressure. The root causes are often a collapse in market confidence, excessive asset bubbles, the outbreak of geopolitical risk, or an abrupt shift in monetary policy. When central banks begin to tighten liquidity, the market starts to panic.

When it comes to investment strategy, first recognize one phenomenon: bear market rallies. This is the trap most likely for new investors to fall into. A bear market rally refers to several days—or even several weeks—of gains within a downward trend, and it’s typically considered a rally if the rise is 5% or more. Many people mistakenly think this means a bull market is starting, only to end up trapped. To judge whether it’s a bear market rally or a true reversal, you need to see whether the up move can sustain beyond 20% and break out of the bear market.

If you want to trade during a bear market, my advice is as follows: First, keep enough cash and reduce leverage and risk. Those “dream on” stocks with extremely lofty valuations and absurd P/E ratios fall the hardest in bear markets, so you should avoid them. Second, if you still want to enter, you can consider defensive assets—for example, healthcare stocks—which tend to hold up better against the economic cycle. Or wait until high-quality stocks have dropped significantly into historical low P/E ratio ranges, then enter in batches, assuming the company has genuine competitive strength. Third, short-selling has a relatively higher chance of working in bear markets, so you can consider using tools like CFDs to look for short-selling opportunities.

Bear market rallies are easy to be misleading, but as long as you stick to fundamentals, watch trading volume, and rely on technical indicators, you can tell whether it’s a real reversal or just a false rally. The key is patience: set your stop-loss and take-profit levels, and don’t be scared off by short-term fluctuations.

History tells us that every bear market eventually passes. On Black Monday in 1987, the market plunged 22.62%. The government took lessons from the Great Depression of 1929 and quickly rolled out stabilization measures, and the market recovered in just over a year. The 1973 oil crisis was even worse: the S&P 500 fell 48%, but it eventually recovered as well.

So when facing a bear market, there’s no need to panic. Adjust your mindset, use the right tools, and you can still find opportunities in a bear market.