Bearish and Bullish Markets: What is The Difference?
In the trading world, it is essential to be aware of the bull and bear market trends because they define the direction of the market -- indicating whether the market is following an upward or downward trend. While upward trends indicate that you can buy more to maximise profits, downward trends suggest that it is time to exit the market by selling the securities as the market can crash anytime. Understanding the bearish and bullish markets can help you in identifying market cycles and profit off them. It also makes it possible for you to earn profit even in sinking markets through short-selling, buying at the bottom, or by going long on significant securities.
What is a Bearish market?
A bearish market is identified by falling prices with a pessimistic outlook. The gloomy market perspective means that the prices are assumed to keep falling in the future. As a trader, you start selling the currency pairs as soon as you realise that you have entered a bearish forex market. It occurs mainly due to a piece of bad economic news like an employment decrease or a calamity shaking up the economy like the global pandemic. A bearish market can also be known as a self-driving phenomenon. When a large number of pessimistic traders look at the market falling, they may start a downtrend by aggressively selling the currency pairs. This happens because they expect the prices to fall more, and exiting seems like the best solution to avoid those losses. In effect, the increase in currency pair supply causes the prices to actually continue dropping – which leads to an actual bearish market trend in the end.
What is a Bullish market?
A bullish market is a financial market where currency pair prices rise continually and are expected to keep growing. Optimistic investors feel confident about the rising prices and start to buy more currency pairs with a motive to profit from the same in the future. Such uptrends can last for weeks, months, and in some rare cases, even years. However, they can also only last a few days, occurring due to a piece of positive economic news like a foreign direct investment or a strong GDP output. Since a bullish market is the exact opposite of a bearish market, it witnesses investors’ willingness to buy the currency pair becoming more significant than their willingness to sell it, which eventually increases the currency pair’s demand. A bullish market at times also occurs due to a bearish market. When the prices continually fall in a bearish market, optimistic traders enter the market and buy the currency pairs at low prices to sell them later at a higher price and make profits. This eventually increases their demand, and the prices start to rise again. With the prices increasing day after day, it leads the forex market back to a bullish trend. Determining whether the market is bullish or bearish can be identified by understanding how the market has been performing in the long term. Small movements represent the short-term trend cycles and cannot be addressed as either bullish or bearish. This means, for a bullish market, an extended increase in prices by at least 20 percent is needed for it to be considered as an actual bullish market segment. With a deep understanding of the bearish and bullish market, you also take a look at bullish and bearish flags, bearish gartley pattern, and the bullish three drive pattern.
Characteristics of Bear and Bull Markets
The forex market and the overall economy of a country have a strong link with each other. The stronger a country, the stronger its currency, and vice versa. A bear market generally depicts weak economic activity in the country as the currency pair prices are continuously falling. It signals that countries are in debt and not able to generate enough wealth. On the other hand, a bull market depicts a robust economic activity in the country as the currency pair prices are continuously increasing. The country is spending enough and making profits, strengthening its economy.
Supply and demand
In a bear market, as the currency pair prices are falling, supply is greater than demand since most traders are willing to sell the currency pairs they are holding. The lower demand results in a further decline in currency pair prices. However, in a bull market, the demand for the currency pairs is strong and sometimes exceeds the supply. As more and more traders buy the currency pair, and only a few are willing to sell, it leads to a further increase in currency pair prices.
Trader’s psychology refers to the combined emotions, behaviour and mental state of the traders. The performance of a currency pair and trader’s psychology depend on one another. So when a market is bearish, traders withdraw from trading and exit their existing trades as they assume they will make a loss. This leads to overall negative market sentiment. On the other hand, when the market is bullish, traders are more willing to participate and enter the market as they believe they will make a profit. This leads to overall positive market sentiment. This is the most significant difference between bull and bear markets.
What is the difference between a bullish and bearish market?
1. Market trends
A bullish market situation is when the market is up, following an uptrend and continually witnessing growing chart lines. However, a bearish market situation is when the market is down, following a downtrend and continually witnessing falling chart lines.
2. Current economic condition
A bullish market trend is realised when the economy strengthens and has a low employment rate. A bearish market trend is identified when the economy is weakening and has a high employment rate. During a currency pair’s bullish market, the country from which the pairs belong witnesses a rise in GDP. In a bearish market, the falling currency pair’s countries witness a fall in the GDP of the country.
3. More number of IPOs
When a currency pair witnesses a bullish market, the countries where the currency pairs come from see an increase in the Initial Public Offering amount in their stock exchanges. This happens because as the currency pairs strengthen, people start believing in the country’s economic standing more and companies come forward to be listed in the stock exchange and collect public funding to operate better. However, in a bearish market, the number of IPOs decreases in the country’s stock exchange, where the falling currency pairs belong. The reduced IPO amount happens because when a currency pair witnesses falling prices, it is believed that those pairs are not strong enough. This, in turn, reflects the country being weak and shakes the belief of companies to be publicly listed.
4. Employment rate
The major bullish market indicators are a rise in the employment rate, a rise in the stock prices, and an increase in the country’s GDP compared to the previous term. The primary indicators of a bearish market are an enormously high unemployment rate, a decrease in stock prices, and a downturn in the country’s GDP.
How to determine a Bullish and Bearish Market?
Currency pair price charts help in determining bearish and bullish markets easily. When the currency pair price chart makes consecutive higher high and higher low price points in the market, it indicates a bull market. In such a market, each higher high price level exceeds the previous higher high price level. The higher low price level touches a higher bottom compared to the previous higher low price level. In a bull market, the prices keep pushing higher and higher with time. This price direction helps in determining are we in a bull or bear market.
When the currency pair price chart makes a consecutive lower low and lower high price points in the market, it indicates a bear market. Each lower low price level exceeds the bottom of the last lower low price level. Each lower high price level touches a lower top than the last lower high price level. In a bear market, the prices keep pushing lower and lower with time. The bear and the bull trade the bearish and bullish markets, respectively.
When does a market change from bearish to bullish?
When a market has been in the downtrend (bearish) for a long period of time, touching lower lows with every trading price, it is said to reverse and change to a bullish trend as soon as the price level touches or falls below the support level. The support level is a point at which falling prices stop falling, reverse and start increasing. A currency pair that has been in the downtrend for months or years tends to be oversold, implying that it has traded much lower in price compared to its actual market price value. At this point, the currency pair is expected to bounce back up and trade in an uptrend, following a bearish market trend.
Can you profit in both bullish and bearish markets?
Yes, you can profit in both bull and bear markets by identifying the ideal price levels to long or short a trade. If you are trading in a bull market, you can enter the market and place long orders to profit from the increasing price. For example, if you want to trade EUR/USD, which is currently trading at 2, you open a long position at this price and wait for the market prices to increase. After a few weeks, the currency pair price touches 4, and at this point, you sell your bullish trade to make a profit that is double your initial investment. If you are trading in a bear market, you can enter the market and place a short trade instead to profit from the falling markets. Shorting a bearish trade refers to placing a sell order in a currency pair with an expectation for the prices to drop.
How can you trade bullish and bearish markets?
You can trade the bullish market by placing a long or buy order on the trade with an expectation of the prices rising in the future. However, you can trade the bearish market by placing a short or sell order on the trade with an expectation of the prices falling in the future. Both markets can be traded by speculating on the currency pair’s price movements and analysing the price chart with technical indicators to forecast the future price movement and place an order accordingly.
Profiting in both bearish and bullish markets is possible
When you know about market trends and cycles and know how to navigate through them with an optimistic market outlook, you can take advantage of both bearish and bullish markets and profit from them. Blueberry Markets is a trading platform that allows you to trade forex, CFDs, commodities and more. Take a look to get started. Sign up for a live trading account or try a risk-free demo account.
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