Understanding the important terminologies and concepts in the trading arena is a crucial skill of a successful trader. Hence the article focuses on the most important terms of the financial market: bearish market and bullish market.
The article contains the following points:
- Bullish and Bearish terms?
- What is the bullish market?
- Know the bearish market
- Characteristics of the bearish market and bullish market
- How to identify a bull or bear market?
- How can you trade bearish and bullish market sentiments?
- Can you profit from bearish and bullish markets?
- Ways to profit with the bearish and bullish market
What does Bearish and Bullish Market Symbolise?
The term bearish and bullish reflects whether traders think the price of a particular asset will decline or surge in future. These terms are also utilised in hindsight for describing falling and rising markets.
What is a Bearish Market?
A bearish market stands in contrast with the bullish market. Some of the general characteristics of the bearish trend are the pessimistic outlook and declining prices. Here traders start selling the assets rather than purchasing. They do so to come out of losing positions or hear the bad news or figures about economic fluctuations.
The beginning of the bearish market depends on the psychology of traders who think that something negative will happen with their trading positions. Thus, in short, a bear market is a self-fulfilling prediction, where many pessimistic traders actively start down-tend by selling off their positions anticipating the price fall, but in effect, cause price declines themselves.
It leads to panic in others, and they also get out of their trading positions. The reverse happens in case of a bull market where the speculator spends in and purchase on the low and cost of assets slowly surge again.
What is a Bullish Market?
A bull market is simply a financial market (whether it is metals, commodities or currencies) where the prices are anticipated to rise or are rising. Some of the general characteristics of the bull market are investor confidence, general optimism and anticipation of constant strong uptrends. The trends generally last for years, months or weeks and can also be as short as some days depending on the conditions surrounding the market.
Predicting the exact trends can prove to be difficult sometimes as traders spectator behaviour and psychology can play a vital role. The market is termed as bullish, usually when the economy is getting out of previous fall or is doing well. Forces like supply and demand also direct the bull market. Strong demand but weak supply will lead to a rise in price as many traders will run behind purchasing the asset rather than selling it.
Characteristic of Bearish and Bullish Markets
Although the stock (or commodity or currency etc.) prices direct a bullish market or bearish market trends, there are several accompanying features which traders must be aware of:
1) Demand and supply of securities
In bullish conditions, there is a weak supply and strong demand for assets. In other words, we can say many traders prefer to purchase the securities and very few traders are ready to sell them. As a result, the price will surge as traders compete to take over available assets.
In bearish conditions, this goes in the reverse direction that of a bull market. More traders look forward to selling rather than purchase. The demand for assets is significantly lesser than supply and thus in result, the price will decline.
2) Psychology of traders
The behaviour of the market is determined and impacted by how traders perceive and respond to various changes. The sentiment and investor psychology plays a vital role and decides whether the market will fall or rise. So there is a direct relation between investor psychology and market performance. In bullish market traders
Investor psychology and stock market performance are mutually dependent. In a bull market, investors willingly participate in the hope of obtaining a profit. During bearish market conditions, market sentiments are negative. Traders start to take out their money.
3) Change in economic activity
The financial market and the economy of the country are strongly linked with each other. Let us take an example of the stock market. The companies whose shares are trading on the exchanges are an integral part of a greater economy. So, fluctuation in the economy will definitely affect the stock price of a given firm.
The bear market is linked to weak economic conditions. Most companies are incapable of generating massive profits because the traders are not willing to spend nearly enough on them. This decrease in profits will affect the market value of stocks.
In a bull market, the opposite process happens. People are willing and have more money to invest in. It strengthens and drives the economy.
How to identify a Bearish and Bullish Market?
As a trader, you need to determine the bear or bull market when it happens. Apart from the decline or rise in the price of assets, there are various other indicators which will help you in determining whether it is bull or bear market. Always note that a short-term variation in the price of the asset does not reflect a bull or bear run. There has to be a continued interval of surge or drop in prices. Some of the indicators are listed below:
Bullish market indicators
Some of the key indicator reflecting the bull run in the market are:
1) Surged demand of an asset
2) The rise in prices of an asset
3) Low unemployment rates
4) More trader purchasing the asset and holding them
5) High gross domestic product growth
Bearish market indicators
Some of the key indicator reflecting the bear run in the market are:
1) Declining gross domestic product growth
2) More trader willing to sell assets rather than holding them
3) Surging unemployment rates
Navigating a bear market
1) Look for an optimum level of liquidity. Spend in liquid bonds and funds
2) Avoid spending in those assets which have stimulated bearish markets in the past
3) Best time to hedge through options and futures
Navigating a bull market
1) Spend a significant percentage of your money into assets
2) Hold the position for a long interval and avoid booking your gains
3) From the starting to middle stages of bullish run focus on mid-caps. At the later stages of the bull run focus mostly on blue-chip assets.
How can you Trade Bearish and Bullish Sentiments?
For traders, bearish and bullish are vital terms. The easy and straightforward to trade these market sentiments are provided below:
1) Spend in surging prices at the time of bull run and when investors’ sentiments are bullish for an asset.
2) Spend in declining prices at the time of the bear run, and when investors are sentiments are bullish for an asset.
There are numerous ways in which a trader can do this:
1) Stay updated with the latest financial news:
The news and journals are an excellent source to understand the behaviour of the market and traders. Many interviews of traders and analysts publish in these newspapers. Along with this, you can also read various financial magazines. Reading regular news cannot help alone; after reading, it is important on your part to connect various dots to make a profitable decision. When a company reports profits, investors are probably bullish in the same way when the firm faces any legal struggles investors are probably bearish.
2) Subscribe a newsletter:
There are some newsletters which provide you with information on the trading sentiment of traders in the market. For example, when some known analyst recommends to sell or buy stock (because they are bearish or bullish for that stock), this newsletter will inform you about it.
3) Making use of technical indicators:
There are numerous technical indicators such as the bears and bulls indicators, which compile the data on how investors feel about the financial market. Some of them make use of mathematical and statistical information, price action and some evaluate several newsletters and compare negative and positive recommendations. The change in absolute data of these tools over time can tell traders where the market will move in future.
4) Oscillators and Relative Strength Index:
One of the most suitable types of technical indicator which measures bearish and bullish momentum indirectly is the oscillator. It provides all the information required to understand how traders feel about the financial market.
Another such technical indicator is the Relative Strength Index or RSI. It relates the number of sold assets with the number of bought assets. The aim of this is to determine where the capital is flowing out of an asset or into an asset. It also helps traders to understand the investors feeling about the market without the need to ask each trader.
These two questions must be striking in your mind first, how to use these indicators second, where you can get them. There are various financial service providers in the financial market, providing you with both technical and fundamental indicators for analysis. They also provide frequent notification on your mobile or computer screen when something small or big happens with your purchase trade.
One such broker is ROinvesting. It is a popular name in the arena of financial services, regulated by the Cyprus Securities and Exchange Commission. It provides technical, fundamental and research tools (earnings calendar, economic calendar, trading signal, news etc.). You can opt for their trading courses to learn how to make use of these indicators while trading.
Can you make a profit in both the Bearish and Bullish Markets?
Investors who have deep knowledge of the situations, market sentiment, the psychology of traders and cycles in the market can take advantage of both bearish markets and bullish markets. When you completely understand the concept of the bearish and bullish run, you can precisely determine the cycles and how and when to make out profit from them. A wise trader can make a profit from both rising and falling market prices. Though smartness, he can come on top. Here are several ways by which you can harvest most out of both market conditions.
Way to make a profit out of bullish market sentiments
1) Find gems with bond ratings
2) Hunt for dividends
3) Search good stocks to purchase
4) Carefully use margin
5) Go short or sell bad assets
6) For generating income write a put option
7) Rotate your sectors
8) Purchase a call option
9) Be patient
10) Write a call option.
Way to make a profit out of bullish market sentiments
- Buying at the bottom
- Going long or buy defensive stocks
- Choosing high-yielding dividend shares
- Dealing short ETFs
- Options Trading
- Trading safe-haven assets
- Currency Trading
The Bottom Line
Both bearish and bullish markets will have a great influence on the investment of traders. So it is an excellent idea to take out some time to monitor and determine what market is going through and when to make an investment decision.
Instead of purchasing the actual asset, you can trade a famous derivative product known as CFD or contract for difference. It helps you to harvest profit out of declining asset prices. The return trader will receive through CFDs largely depends on the variation in the worth of the underlying asset over a specific interval (it includes both decrease and increase). ROinvesting is a popular firm providing cfd trading on many tradable asset classes such as stock, currency, indices, commodity and forex. The minimum deposit to open a trader with the broker is just $250.