In the trading world, it is essential to be aware of the bull and bear market trends because these trends define the direction of the market. They indicate 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 assets as the market can crash anytime.
Understanding the difference between bearish and bullish markets can help you in identifying market cycles and how you can profit off them, which in turn, allows you to better strategise your entry and exit points. It also makes it possible for you to earn profit even in downtrending markets through short-selling, buying the dips, or by going long on significant assets.
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. Most traders start going short on currency pairs as soon as they realise that the market has entered a bearish trend.
It mainly occurs due to the release of unprecedented economic news like an employment rate 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 currency pairs. This happens because they expect the prices to fall further, 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. This leads to an actual bearish market trend in the end.
What is a bullish market?
A bullish market is a financial market trend 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 the hopes of earning profit from it 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. This mostly occurs due to a release of positive economic news like a foreign direct investment or a strong GDP output.
Since a bullish market is the exact opposite of the 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. As the demand for a currency increases, so does its valuation in the Forex market.
A bullish trend can also occur in 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 drives 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 identified as either bullish or bearish. This means that for a bullish market, an extended increase in prices by at least 20% is needed to be considered as an actual bullish market segment.
What is the difference between a bullish and a bearish market?
1. Market trends
The most apparent difference between the two markets is their trends. A bullish market follows an uptrend and witnesses continually growing chart lines. However, a bearish market follows a downtrend and witnesses continually falling chart lines.
2. Current economic condition
A bullish market trend is realised when the economy strengthens and has a high employment rate. A bearish market trend is identified when the economy is weakening and has a low employment rate.
If the currency pair’s market is bullish, the country from which the pairs come from, witness a rise in Gross Domestic Product (GDP). In a bearish market, the falling currency pair’s countries witness a decrease in the GDP.
3. Number of Initial Public Offerings
When a currency pair has a bullish market, the countries where the currency pairs come from see an increase in the Initial Public Offering (IPO) amount in their stock market exchanges. This happens because as the currency pairs gain strength, people start believing in the country’s economic standing more. 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 decrease. The decrease in IPO amount happens because when a currency experiences a decrease in its prices, it signals that the country’s economy is weak. This shakes the belief of big companies and investors to be publicly listed.
4. Economic health of a country
Some of the indicators of a bullish market are a rise in employment rate, a rise in stock prices, and a significant increase in the country’s GDP. On the other hand, primary indicators of a bearish market are an increase in the unemployment rate, a decrease in stock prices, and a downturn in the country’s GDP.
Take advantage of bullish and bearish markets
When you know how to navigate market trends and cycles, you can take advantage of both bearish and bullish markets. One of the ways you can do this is by trading Contract for Differences (CFDs) instead of buying actual assets.
Blueberry Markets allows you to trade CFDs securely on our industry-leading platforms. Sign up for a live account now to get started.