How to Beat The Bear Market with Algorithmic Trading

Bear markets are normal and a fact of life. It is hard to predict how long they will last or anticipate when they will come, however the good news is that you don’t necessarily need to know that in order to capitalise on them. Bear markets present a rare opportunity to not only accumulate your holdings but the perfect time to build and take advantage of a downwards trending market with the help of algorithmic trading.

We take you through how you leverage algorithmic trading to beat the bear market and expand your knowledge of trading strategy concepts, to help you avoid sitting around panicking on when to sell, but instead capitalise on a market full of opportunity.

What is a bear market?

A bear market is commonly defined as an asset market decline of 20% or more as reflected, for example, in a broad index like the S&P 500 or the Nasdaq Composite, this can also be a period of prolonged and volatile decline in price for the majority of assets in a market. When applied to the cryptocurrency asset market, it may result in projects or companies going bust as prices of their crypto asset holdings decline and they struggle to raise funds or meet user and investor expectations.

When looking at crypto bear market trends, it usually begins with a demand-supply imbalance that results in investors placing sell orders. This stems from fear, uncertainty and doubt (FUD) affecting market sentiment as a result of a declining market, where sell orders outweigh buyer-demand and don’t recover quick enough. From a technical trading perspective, when looking at candle charts or an order book this can be illustrated by a series of lower priced sell and buy orders that continually decline from a longer range chart view.

In contrast you have a bull market which is the opposite of a bear market and this is when market price follows a positive trend or continual increase in asset value.

Bear market phases

To capitalise on a bear market you will need to know the traditional phases a market goes through before either exiting a bear market or transitioning towards a bull market.

Beginning cycle

The start of the bear market cycle begins right after assets reach their peak price during a set period of stability or bull market trend. Because the market sentiment has remained bullish (positive) for a long period, investors continue to have optimism about market recovery when initial pullback occurs. This will often be illustrated by external news or industry sentiment.

Early-stage bear market

The early-stage bear market is characterised by significant downwards market movement but is maintained by short recoveries. This is due to the market being optimistic of recovery and going to new highs due to the overall market sentiment that lingers from the preliminary phase. However, the attempted recovery fails to cover the extent of the downward market movement which results in red candles dominating the market with attempts of smaller green candles across longer time frame charts.

Full-fledged bear market

This phase is considered to be the main bear market phase and is what most individuals associate overall market sentiment with. This phase is marked by significant downwards trend, with little to no increasing movement across longer time frames. During this phase investors are offloading their assets in large quantities and although there may be some rallying (short period of upward price movement) against the downwards trend which may illustrate price increasing but this does not last long and continues to decline. At the latest in this stage, crypto-native companies begin to pivot their portfolio/investment strategy and begin to downsize.

Closing bear market

In this stage, the market bottom begins to form and the downwards trend stabilises. The market reaches a price that is attractive enough for buyers to engage with, and asset prices begin to increase with momentum. At this point most investors who are wanting to sell have already sold, this is where the shift in buyer demand over takes the demand in sellers cause green candlers to appear in a medium time length. However there is some resistance in red candles but not enough to pull the market price down.

What are the different types of bear markets?

It is also important to note there are different types of bear markets and reasons to why the market moves in a downwards trend.


This can be due to the reaction of significant events that are taking place around the world or within an industry. For example, regulatory news impacted the crypto industry with sanctions and freezing of assets from financial governments causing crypto winter.


This bear market occurs when a financial bubble or other economic imbalance collapses. For example, the global financial crisis or the subprime mortgage crisis.


This type of bear market can occur by rising interest rates and high inflation rates at the end of a business cycle.

How to use algorithmic trading to trade and invest in a bear market

By having an understanding of bear markets and knowing the different phases in which the cycle goes through allows traders to analyse market conditions and find suitable trading strategies to execute. This can be done using either manual or algorithmic trading. To ensure traders save time and money, have less emotional trade execution, and have more reactive trading capabilities utilising algorithmic trading will be most effective.

By using a trading algorithm you can ensure that your trading decisions are not affected by emotional factors, such as market gossip, news or other headlines. This allows you to stick to your trading strategy from the outset and not get lost in the FOMO or FUD that is no-doubt surrounding you during a bear market. This instead allows you to consistently trade based on statistics, quantitative finance and technical analysis, much like large traditional financial institutions.

Top 4 algorithmic trading strategies for a bear market

Mean reversion trading systems

Mean reversion is a trading strategy that suggests the asset price volatility will revert to the long-run mean or average of that data set. This strategy relies on the assumption that the asset price will revert back to the average. If the asset price is above this calculated average value you set up your trading algorithm to place sell orders. If the market price is below this average value, set buy orders. This allows you to be active on any price action revolving around the long-term mean average. This strategy is very well suited for a bear market due to the volatile nature and using mean reversion to balance this, while it is always important to follow risk management practises, for example use of “stop loss” functionality.

Swing Trades

Swing trading is a speculative trading strategy where traders will take short term positions that might last for one or more days, then execute a buy/sell order to anticipate price movement. Swing trading involves using technical analysis to create logic behind price movement that usually comes down to utilising an established risk/reward ratio, or looking at specific technical indicators from fluctuation of an asset. Setting up a trading algorithm allows you to improve the effectiveness of the strategy as it can analyse the price movement far quicker than humans and can execute it anytime around the clock, which is imperative when applied to crypto markets. Using swing trading strategy can be effective in a bear market as even though the market trend is moving downwards, there will be price movement or resistance for the algorithm to capitalise on.

Dollar cost averaging

ollar cost averaging is a trading strategy that operates on the principle of allocating a set amount of funds to invest into an asset over a continual set period of time (e.g weekly, monthly, bi-monthly). This strategy is usually used for long-term investing and in cohesion with buying the price dip.

By pairing a dollar cost averaging trading strategy and a trading algorithm allows the trading to completely remove the emotional aspect of trading. This allows the trader to become active during a time of uncertainty and ensure they are at a comfortable place when market reversion occurs.

This trading strategy can be particularly effective through market volatility and down markets, when traders have the ability to buy shares or crypto assets at lower prices.


Short selling is a trading strategy that speculates on the decline of an asset’s price. This method is a way in which traders can follow the directional momentum in a bear market by taking sell positions to speculate on the falling market price. If the trader’s prediction is correct they will make a profit, however as prices can fluctuate both ways, the trader will incur a loss if the price moves against their position.

Using a trading algorithm to execute short orders can be a reliable way to turn a profit during a severe phase of a bear market, due to many assets falling in price. However by opting to short will incur larger risk due to shorting assets that are not personally owned. Shorting typically requires traders to borrow the assets they want to sell, which incurs some interest costs, or traders may choose to trade futures contracts.

The bottom line

Bear markets are notorious for being difficult to navigate and hard to predict, they lack the thrill and ease found in bull markets, however because of this and FUD, it provides opportunity for advanced traders to capitalise on this. It is important to stay active during this period, whether that be using the strategies listed above or educating yourself on different aspects of crypto.

If you do choose to take a more active trading approach, make the most out of the resources available today. By leveraging modern technology and automated trading systems, traders are able to put themselves in the best possible position to succeed. Whilst profiting in a bear market may seem ironic and not possible, opportunities do exist and many people have found success by doing this.

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