Bear Market
A bear market is a sustained period of falling prices, commonly defined for stock indices as a decline of 20% or more from a recent high.
A bear market is the opposite of a bull market: a long decline with pessimistic sentiment.1 Bear markets are where many traders lose the gains of the previous years — not only because prices fall, but because sharp rallies inside a decline tempt people to buy too early, and volatility punishes positions that are too large. This entry explains the common definition, how bear markets differ from corrections, and how to protect an account in one.
- Category
- Trading Basics
- Reading time
- 5 min
- Also called
- Bearish market, Bear phase, Bear market rally
- Updated
A bear market in plain words
A bear market is a time when stock prices are declining and sentiment is pessimistic. Generally, it is said to occur when a broad market index falls by 20% or more over at least a two-month period.2
The name is usually linked to how a bear swipes its paws downward, though the phrase’s exact origin is uncertain. The opposite is a bull market.
How to identify a bear market, step by step
Pick a broad index
As with bull markets, the label applies to a broad market rather than a single stock.
Find the most recent high
Measure from the highest close before the decline.
Measure the fall
A decline of 20% or more from that high, over at least two months, is the usual threshold.2
Check the structure
Lower highs and lower lows on weekly charts show a downtrend, not a brief shake-out. See Trend.
Expect sharp rallies
Bear markets often contain fast, large rallies that fail. Treat them with suspicion until the structure changes.
Adjust risk
Volatility usually rises in bear markets; smaller positions keep the money at risk the same. See Volatility.
Worked examples
Example 1 — Applying the 20% rule
BearAn index peaks at 4,800, then falls over four months to 3,700.
| Fall from the high | (4,800 − 3,700) ÷ 4,800 ≈ 22.9% |
| Period | Four months (more than two) |
| Bear market threshold | 4,800 × 0.8 = 3,840 |
By the common definition, the index entered a bear market when it closed below 3,840.
Example 2 — A bear-market rally
Rally trapFrom 3,700 the index jumps 12% to 4,144 in three weeks, then falls to new lows at 3,500.
| Rally | +12% — feels like the bottom |
| Buyer at 4,100 | Then −14.6% to 3,500 |
| Lesson | Sharp rallies are common inside bear markets |
Big rallies without a change in trend structure are a classic trap. Waiting for higher lows costs some upside but avoids many false starts.
Example 3 — The recovery maths
RecoveryAn investor’s portfolio follows the index from 4,800 down to 3,500.
| Decline | ≈ −27.1% |
| Gain needed to recover | 4,800 ÷ 3,500 − 1 ≈ +37.1% |
Losses need larger gains to recover, which is why limiting damage in a bear market matters so much. See Drawdown.
A bull market, then a bear market
Pullback, correction and bear market
Trading and investing in bear markets
Protecting capital
Smaller positions, firm stops and lower leverage limit drawdowns. See Position Sizing.
Short selling
Some traders profit from declines, but bear-market rallies make shorts dangerous too. See Short Selling and Short Squeeze.
Hedging
Investors may reduce exposure or hedge rather than sell everything. See Hedging.
Long-term buying
Long-term investors sometimes add gradually during declines, accepting they will not buy the exact bottom. See Dollar-Cost Averaging.
Advantages and disadvantages
Advantages
- Prices of quality assets can become cheaper for long-term buyers.
- Short sellers and hedgers can profit from falling prices.
- Excesses of the previous bull market are cleared out.
Disadvantages
- Losses compound quickly, and recovery needs larger gains.
- Volatility and fear lead to poor decisions.
- Sharp rallies trap early buyers and squeeze short sellers.
- Liquidity can thin out, widening spreads and slippage.
Going deeper
Read as far as you need. Each level builds on the one before it.
Do not try to catch the exact bottom
Beginner
Bottoms are only obvious afterwards. Buying in stages, or waiting for the trend structure to improve, reduces the risk of buying far too early.
Bear markets and recessions
Intermediate
Bear markets often accompany economic recessions, but not always: stock markets can fall 20% without a recession, and they often start recovering before a recession ends. See Recession.
Correlations rise in sell-offs
Advanced
In sharp declines, many assets that usually move independently fall together as investors reduce risk across the board. Diversification still helps, but less than calm-period correlations suggest. See Correlation and Risk-On and Risk-Off.
Common mistakes
Buying every big rally
Rallies of 10% or more inside bear markets are common; wait for structure to improve.
Averaging down without limits
Adding to losers repeatedly can turn a decline into a disaster. See Averaging Down and Averaging Up.
Keeping normal position sizes
Higher volatility means the same size carries more risk.
Panic selling at the low
Decide your plan before the decline, not during the worst week.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A bear market is a sustained decline with pessimistic sentiment.
- Common definition: a broad index down 20% or more from a high over at least two months.
- Sharp rallies inside bear markets often fail.
- Volatility rises — reduce size to keep risk constant.
- Losses need larger gains to recover, so limiting damage matters most.
Frequently asked questions
How long do bear markets last?
What is the difference between a correction and a bear market?
Should I sell everything in a bear market?
Further learning
- Bull Market
The opposite regime.
- Drawdown
The arithmetic of losses and recovery.
- Short Selling
How traders profit from falling prices — and the risks.
- Position Sizing
Keeping risk constant when volatility rises.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- IG. Bear market definition (opens in a new tab) Checked .
- Investor.gov (SEC). Bear Market (glossary) (opens in a new tab) Checked .
Read more elsewhere
- Investopedia: Bear Market (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.