Understanding Bearish And Bullish Market

Understanding Bearish And Bullish Market

Source: CFI

FX, Crypto, commodity, and stock trading have their lingo.  For a new trader, you must be prepared to hear trading terms like “bullish” and “bearish” very often.  Getting a good grasp of these words is important because they efficiently explain market opinions.  You also need to know them to be able to communicate with other FX or crypto traders.  

With a good grasp of these terms, you will find it easier to talk about what you are doing.  You will also find it easier to interpret the actions of another trader.  Most importantly, you will more easily know what direction the market is going.  This is because both the media and top economists use these terms to express their thoughts and beliefs as to how the overall market and the economy are faring.  In this article, we will explain the bullish or bearish market.  We will also touch upon how you can benefit from each.

Definition

Source: the balance

A market on the rise is called a bull market.  This happens in cases of generally favourable conditions of the economy.  On the other hand, a market on the fall, with stocks declining in value is a bear market.  In simple language, in a bear market, prices are plummeting, while in a bull market, prices are skyrocketing.   To describe a market bearish, there typically has to have been a price decline from the peak of 20% or more!  In the same way, a market is considered bullish when there has been a 20% price rise from the dip.  One thing is clear: the attitudes of investors greatly influence the financial market.  And the terms “Bullish” and “Bearish” also signify the feelings of investors concerning the market.

The Bull Market

Source: the street

For a market to be called bullish, it must maintain a long period in an uptrend with prices pushing even higher.  Short “bullish” sessions or temporary price rises do not amount to a real bull market.  Rather, prices must steadily keep rising for months or even years before a market can be called bullish.   And the term is used to mean the same thing in both the stock, commodities, currencies, real estate and even bonds markets.  The term was coined from how bulls attack.  With their horns, they lift their prey off the ground and throw such prey into the air.  And that is likened to prices rising in the market.  

And so “bulls reign” in the market induces higher investment drives because of such boosts confidence.  In turn, this brings about rises in many markets, such as stock markets and the FX currencies, notably the AUD, CAD, NZD, (Australian, Canadian, and New Zealand respectively), and other emerging currencies.

The Bear Market

Source: Forbes

The bear market is directly opposite the bull market.  The term was coined from how bears attack their prey: they rise on their hind limbs and tear down the prey.  Such tearing down is what is likened to the falling prices in the market.  In bearish markets, there is a long period of the downtrend in prices.  And investors tend to sell riskier assets, like stocks and currencies that are not so liquid, like those from emerging markets.  Usually, traders tend to enter the market in prolonged bearish periods to buy up.  The reason is that they tend to believe that the bearish period has reached its zenith.

Difference Between Bullish and Bearish Market

1. When the market is bullish, demand for securities is strong while supply is weak.  Simply put: investors are out to buy securities but no investors are willing to sell.  And so available equity will be little and investors will compete to buy them.  This competition causes prices to rise.  On the other hand, when the market is bearish, we have the opposite: equity supply is high as investors are out to sell.  But demand is very low since almost no investor wants to buy.  This causes prices to plummet.

2. Usually, there is negative market sentiment in a bearish market.  What this means is that investors divest from equities into securities that are of fixed-income nature and hibernate there to wait for the stock market to show signs of positive changes.  Simply put: market price-falls cause investors to lose confidence and keep their money from the market.  That leads to a general decline in prices due to an increase in outflows.  When the market is bullish, however, investors assuredly participate with high hopes of making profits.

3. A bearish market and a weak economy go hand-in-hand.  During both (bearish market and weak economy), consumers do not spend enough.  And so there are hardly any records of huge profits. And because there is a decline in profits, the market value of stocks is directly negatively affected.  On the other hand, in a bull market, we have the opposite: consumers willingly spend more because there is more money to spend.  In turn, the economy is strengthened

Determining Both Markets

A price chart can be used to easily identify both markets.  For bullish markets, there are clear successive higher highs as well as higher lows.  Each higher high exceeds the top of the prior higher high.  And each higher low has a higher bottom than the preceding higher low.  The graph below best explains what we have just described as a bull market:

Source: My trading skills

Now, look at the graph again.  Can you see that each succeeding higher high (or swing high), as well as higher low (or swing low), is higher than the previous?  On the way up, you can see irregular price falls.  That is just price correction.  We cannot call that a bear market.  The fresh higher highs that keep forming make it still a bull market.

Invert the bull market and you have a bear market.  In the bear market, the price forms are consecutive lower lows as well as lower highs.  Each lower low exceeds the bottom of the previous lower low.  Each lower high forms a lower peak than the previous.

Source: dalalstreet

How To Act in Any Market

An investor in the bull market should take the opportunity of rising prices and buy stocks early.  Then he can sell them at a good profit when the bullish period reaches its peak.   Losses during bullish periods are usually minor and transient.  It is best then to invest in more equity with confidence because there is usually a higher chance of making a profit.  But in a bear market, losses are greater.  This is because prices and values endlessly plummet with no end in sight.  So it is ideal and more profitable to engage in short selling.  Better still, go into safer investments.

Conclusion
Both markets have a huge influence on investments.  So to take time to determine the state of the market before making investment decisions.  Being prepped for both markets requires good financial planning.  It would do you a world of good to engage the services of a financial advisor to fashion out a good plan.  Do all you can to avoid one of the investors’ biggest traps: letting emotions rule their investment decisions.