Bearish definition

What does it mean to be bearish in trading?

Being bearish in trading means you believe that a market, asset or financial instrument is going to experience a downward trajectory. Being bearish is the opposite of being bullish, which means that you think the market is heading upwards.

Being able to identify bearish trends is an important part of trading because market sentiment is a key factor in determining how financial markets move. When the bearish pressure in a market is stronger than the bullish pressures, the market will usually drop in price. For this reason, a market that is experiencing a sustained decline in price will be referred to as a bear market. Spotting when a bear market is taking hold or coming to an end is key to both profiting and limiting loss when trading.

Bearish traders believe that a market will soon drop in value and so attempt to profit from its decline. This puts them in contention with bulls, who will buy a market in the belief that doing so will return a profit.

Famous bearish traders

A few traders are recognised for making legendary bearish trades or sticking to their guns even when no one else did:

• Peter Schiff is a stockbroker who became famous for his bearish sentiment when he predicted the stock market crash of 2007/2008
• George Soros is well-known as ‘the man who broke the Bank of England’ after making around $1 billion when he bet against the British pound in 1992
• Jesse Livermore was a legendary stockbroker in the 1920s known as ‘the great bear of Wall Street’. His most famous trade was his short position during the stock market crash of 1929, which made him $100 million
• Simon Cawkwell, also known as ‘Evil Knievel’, is one of the most controversial bearish traders. One of his most famous trades was when he made £1 million by shorting shares in the aftermath of 9/11
• Paul Tudor Jones tripled his initial capital by shorting the stock market during the crash of 1987, also known as Black Monday
• John Paulson shorted the real estate market during the stock market crisis of 2007/2008 and made $3.7 billion off his trades

How to take a bearish position

To take a bearish position, many traders will short sell. Short-selling is a way of trading that returns a profit if an asset drops in price.

Traditionally, if you were short-selling stock, for example, you would borrow some stock from your broker, and immediately sell it at the current market price. Once the stock has dropped in price, you would then buy it and return it to your broker, keeping the difference in price as profit. However, derivatives – such as CFDs – have made the practice of short-selling much more accessible, as they can be used to buy and sell a wide variety of markets.

There are many other ways to attempt to profit from falling markets. For example, inverse ETFs are designed to profit from a decline in the price movement of their benchmark index.