Trading Rising and Falling Markets
As we all know, the COVID-19 pandemic has had a major impact not only on public health but also on the global financial markets. Since the coronavirus-inspired storm that began in February 2020, we’ve seen the market react with large drops, often followed by large increases, which together have created high levels of market movement as investors attempt to understand the new situation. So, what is a trader to do when faced with this kind of global event?
Unlike buying stocks on the stock market, where you can only make a profit when markets are rising, trading CFDs (Contracts for Difference) allows investors to work with price movements in either direction, and as a result, to potentially benefit from both rising and falling markets.
That’s why today, we wanted to focus on one of the main advantages that trading CFDs offers: the opportunity to open either ‘long’ or ‘short’ positions, according to the market conditions and your trading strategy.
In a nutshell, CFDs offer traders an opportunity to profit (but also to lose) from price movements in the financial markets without owning the underlying asset.
Usually, when trading stocks, commodities, currency pairs, or other instruments, the goal is to generate returns that outperform buy-and-hold investing. Trading profits and losses can be generated as investors attempt to buy at a lower price and sell at a higher price, usually within a relatively short period of time. But the reverse is also true: profits and losses can be made by selling the instrument and then trying to buy it back at a lower price if the market falls.
CFD trading is an investing method that offers a wide variety of approaches and strategies based on each trader’s individual market expectations in both rising and falling markets. Let’s take a closer look at two of the most common trading methods to trade either rising or falling markets: Long vs. Short.
Introduction to Rising, Falling and Flat Markets
Financial markets move in cycles, swinging between periods of optimism and pessimism. Understanding these phases—and what drives them—helps you align your trading strategy with the prevailing environment.
Key Market Definitions
- Bull Market
A sustained period in which asset prices rise by 20 % or more from recent lows. Bull markets are driven by strong economic growth, improving corporate earnings and positive investor sentiment. - Bear Market
A sustained decline of 20 % or more from recent highs. Bear markets often coincide with economic slowdowns, falling profits and negative sentiment, with investors seeking safety. - Flat (Sideways) Market
When prices oscillate within a relatively narrow range (typically ±10 %) without a clear uptrend or downtrend, flat markets reflect uncertainty or equilibrium between buyers and sellers.
Glossary Sidebar
- Correction: A drop of 10–20 % during a bull market is often seen as a healthy pullback.
- Reversal: A change in trend direction, signalling the end of a bull or bear phase.
- Consolidation: A flat period where price “rests” before resuming a trend.
What Drives Market Cycles?
- Economic Fundamentals
• Growth & Earnings: Rising GDP and corporate profits tend to fuel bulls, while contractions and earnings misses usher in bears.
• Inflation & Interest Rates: Central-bank rate cuts can ignite a bull phase, whereas rate hikes to combat inflation often trigger bearish reactions. - Investor Sentiment
• Confidence vs Fear: Surveys and indicators (e.g. the VIX) measure fear; low fear often coincides with bull markets, while spikes signal potential bear turns.
• Risk Appetite: In bull phases, traders chase higher returns; in bear phases, they flock to safer assets like bonds or gold. - Policy & Geopolitics
• Fiscal Stimulus: Government spending and tax cuts can underpin bulls, whereas austerity or geopolitical tensions may erode confidence.
• Trade & Regulation: Tariffs, trade agreements or regulatory changes can accelerate market shifts by impacting corporate outlooks. - Technical Factors
• Trend Followers: Large flows from algorithmic and institutional trend-following strategies can amplify moves once certain price levels are broken.
• Volume & Liquidity: High trading volumes support sustained uptrends; drying liquidity can exacerbate declines in bear markets.
Case Studies: Navigating Recent Bull and Bear Markets
Case Study A: Riding the Post-COVID Bull Run (March 2020 – January 2022)
- Context: After the sharp sell-off in February–March 2020, global markets rebounded strongly on unprecedented fiscal and monetary stimulus.
- Strategy Employed:
- Dip-Buying: Traders added to positions when major indices retraced 5–10 %, using limit orders to enter at favourable levels.
- Trailing Stop-Losses: A 10 % trailing stop protected gains as the S&P 500 climbed over 75 % by January 2022.
- Outcome: Those who scaled in on pullbacks and locked in profits on strength realised net returns of 50–70 % over this period.
Case Study B: Weathering the 2022 Market Downturn (January 2022 – October 2022)
- Context: Rapid inflation and central-bank rate hikes triggered a broad sell-off, with the FTSE 100 down almost 15 % and tech-heavy Nasdaq off more than 30 %.
- Strategy Employed:
- Hedging with Options: Buying protective puts on core equity holdings, limited drawdowns to 5–10 %, even as underlying indexes tumbled.
- Selective Short Positions: Shorting overextended high-flyers using CFDs allowed traders to profit during sharp reversals.
- Outcome: Hedged portfolios outperformed unhedged equivalents by 20 – 25 %, while disciplined shorts delivered additional alpha.
Trader’s Checklist
- Confirm the prevailing trend with moving averages or trend-line breaks.
- Set stop-loss orders at key support/resistance levels.
- Check trading volume to ensure sufficient liquidity.
- Use partial profit-taking to lock in gains on strong moves.
Test these approaches yourself in a risk-free environment—open a demo account today to practise on live charts.
Trading Strategies with Examples
Stop-Loss Placement
- Identify Key Levels: Locate recent support or resistance on your chart.
- Set Initial Stop: Place your stop-loss 1–2% below (long) or above (short) that level, or use 1.5× the Average True Range (ATR).
- Trail Your Stop: As the trade moves in your favour, adjust the stop to lock in profits—e.g. move it to breakeven once you’re 1.5× your initial risk ahead.
Example: You buy an index CFD on a bullish breakout, set a stop 2% below entry, then trail it by 1% increments as the price rises.
Hedging Approaches
- Protective Options: Buy at-the-money puts to cap your downside on long stock or ETF positions.
- Inverse CFDs: Open a short CFD position in the same asset to offset potential losses.
- Overlay Adjustments: Scale your hedge up or down as volatility expectations change.
Example: Holding oil futures long while buying a small put on an oil ETF to limit drawdown if the market reverses.
Long vs Short Execution
- Long Entries: Wait for a moving-average crossover (e.g. 20-day above 50-day) or a breakout above consolidation.
- Short Entries: Look for breakdowns below key support or bearish chart patterns (e.g. head-and-shoulders).
- Confirmation Across Timeframes: Check signals on both hourly and daily charts to reduce false moves.
Example: Shorting a technology CFD once it breaks below its 50-day MA on heavy volume.
Trader’s Checklist
- Define your entry, exit and stop-loss before placing any trade.
- Risk no more than 1–2% of your account on a single position.
- Confirm your signal across at least two timeframes.
- Record each trade in your journal, noting your rationale and outcome.
Refine these strategies on live charts without risk—open a demo account today to start practising.
Trading Rising and Falling Markets FAQ
- What is a market correction?
A correction is a 10–20 % drop from recent highs, often viewed as a normal pullback within a broader uptrend.
- How long do bull and bear markets typically last?
On average, bull markets run for 4–5 years and bear markets for about 1–1.5 years, though individual cycles can vary widely.
- How can traders protect positions during a downturn?
Traders often use stop-loss orders, diversify into defensive assets or hedge with options to limit potential losses.
- How do you trade in a flat market?
In sideways markets, buy near support and sell near resistance, aiming to profit from predictable price swings within the range.
