Investment strategies

Making money during the bear market - Dream or Reality?

August 19, 2022
3 min read
The short answer is yes - but there is, of course, a catch. 

There are financial products such as futures contracts tailored specifically for this purpose. In futures contracts, two parties agree to buy or sell an asset in the future at a specific date and price, regardless of the asset’s future price. One party will take a long position, and the other party will take a short position. The long position will make a profit if the price increases, whereas the short position will make a profit if the price decreases. Traditionally, futures contracts were used to lock the price of an asset and hedge against unfavourable price movements. Imagine a farmer producing a crop and opening a short position tied to the price of this crop. If the price decreases, the farmer will make enough profit from the contract to offset the loss due to falling prices. The farmer then is able to hedge and lock the price at a value considered as acceptable. 

Futures are used by traders to speculate about market movements and make a profit regardless of the direction of the prices. But here’s the catch - futures trading requires the ability to forecast price movements, which is not a trivial task. A trader who cannot forecast the market will be wrong half of the time, which means that even if the market is going up, the trader will lose money half of the time. The profits and the losses would cancel out, and the trader will be consistently losing money in fees. There’s a saying that "everyone is a genius in a bull market". However, this does not apply to futures trading, as even in a bull market a naive trader will be losing money half of the time. Some professionals even believe that markets are perfectly efficient, and that therefore there is no way to consistently beat the market, as there is no predictability at all. Our view, borne out by fact, is completely different. We believe that markets are far from perfect. For example, it is very clear that markets are heavily influenced by human psychology. When prices rise, investors flock to the market producing further price increases. When prices drop, panic sales lead to a further decrease in prices. 

Besides the difficulty of forecasting the market, futures trading often involves the use of leverage - the ability to trade with more money than you actually have. This can be a double edged sword, because leverage can amplify losses more than profits. As a simple example, let’s imagine that the price of an asset rises 10% and then comes back to the initial value. With no leverage, the user would have lost a small amount of money in fees, but there wouldn’t be any losses due to price movements, because the price went back to its initial value. With leverage however the situation is different. If we consider 2x leverage, the user would have made 20% profit in the first trade, when the price went from 100 to 110, and then lost again 20% when the price went back to its original value. If the initial capital was 1000 USD, the capital would have become 1200 at the end of the first trade. In the second trade though, the trader lost 20% too, but 20% of 1200 is 240, and the final capital would be 940. So even if the trader made 20% and then lost 20%, the trader would have a net loss of 40 USD. 

At Peccala, we give our users exposure to the benefits of futures trading, without the headache of forecasting the market and adjusting the leverage to m profits. This is all done through our proprietary 24/7 trading engine.