Bullish vs. Bearish Market: Differences & How to Adapt Your Trading Style?

Trading concepts

Bullish Bearish Market
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Introduction

Trading has a special language of its own. For a new trader, words like long, short, bullish and bearish should not be strange to you. You must know what they mean as they are used to describe the state of the market.

  • Long: this is a trading term for buying or owning a security or stock.
  • Bull: this refers to an investor who is optimistic as regards the price of a stock to rise
  • Short: this is used to refer to selling of borrowed shares, with the hope that stock will drop in price, so as to later re-purchase it at a lower price.
  • Bear: This refers to an investor who is pessimistic as regards the price of a stock.

What does bullish mean?

A bullish trend is an uptrend of a certain asset. Bulls believe that the price of a certain security or commodity will go up. For instance, if an investor says “I am bullish on bitumen”, it means such a trader believes that the bitumen price will rise. Also, the word bullish and long mean the same thing and can be used interchangeably.

An investor could as well say they are long on an asset. It means they believe that such an asset will experience a price increment. A bull market is a market with a long-term upward trend, and with price scaling up continuously.

What does bearish mean?

A bearish trend is a downtrend of a certain asset. Bears believe that the price of a security or stock will decrease. A bear market is a long-term downward trend, and prices fall incessantly. For instance, a trader may say, “I’m bearish on gold”. This means that the investor believes that the price of gold will go down.

Why is it referred to as Bullish or Bearish?

Both the term “bullish and bearish” are believed to have stemmed from the way bulls and bears attack their prey. A bull lunges its horns in the air, while a bear will draw in its prey down. The bear was the first to be used around the 18th century.

A proverb was referenced and associated with it, “to sell the bear’s skin before one has caught the bear”. Later on, the bull was included to denote a speculative buy. Bulls and bears have been in existence from then till this moment in the trading world.

Is it better to be bullish or bearish?

Either becoming bullish or bearish is dependent on your market’s view. Predicting the direction a market would take can quite be challenging. However, that shouldn’t debar you from taking a position. By making a proper risk assessment, you would be able to minimize your loss and safeguard your capital whether your view is bearish or bullish.

Characteristics of Bull and Bear Markets

  • Supply and Demand of stocks: during a bull market, there is a huge demand and small supply for stocks. This means that most traders are offering to purchase stocks but just a handful are offering to sell them off. This will lead to rising of stock price as there would be completion among traders to buy stocks. The inverse would be true in a bear market. Most traders would be offering to sell while just a few would be willing to buy. The demand here is few and this would lead to a drop in the price.
  • Trader disposition: since the behavior of the market is dependent on people’s behavior and reaction, trader’s disposition and emotion would lead to the trader’s behavior dependent on each other. During a bull market, traders take part willfully with the aim of making profit. For a bear market, market emotion is negative. Traders go on to remove their money out of equities and into fixed income securities while they wait for a positive movement in the stock market.
  • Change in Economic Activity: due to the fact that participants in the greater economy are the ones whose business stock are trading on exchange. The economy and the stock market are greatly intertwined.

A bear market is linked with a weak economy. Numerous businesses are not able to make substantial profits because consumers are not spending close enough. This low-profit yield has an impact on the way the market attaches worth to stock. However, in a bull market, the inverse happens. People have money to spend and the willingness to spend it is there. This controls and fortifies the economy.

What to Do in Each Market

During a Long market, the right step for a trader to take is to leverage on the increasing prices by purchasing stocks quickly in the trend and then selling them as soon as they attain their height. You should ensure that any loss remains minimal and ephemeral in a long market. A trader can actively and buoyantly invest in more equity with a larger chance of realizing any gain.

In a short market, however, the probability of running into loss is larger because prices depreciate continuously and the end is usually not visible. And when you decide to go into an investment with the optimism of realizing a profit. There is a probability of you incurring loss before the profit comes in. Hence, the majority of the gain can be located in a bear market or less risky investments, such as fixed-income stocks.

A trader can as well switch to defensive securities, whose ability is just minimally impacted by switching trends in the market. Therefore, defensive securities are fixed in economic gloom and boom orbit. These are firms such as utilities, which are usually possessed by the government. They are demands that people purchase not considering the economic state.

What is a Bullish Reversal?

A bullish reversal is when a stock begins to trend in the upward direction after it has been originally trending downward direction. A reversal is different from a pullback and depicts a huge trend, which is a counter-move during a trend that fails to switch the entire path of the trend

Conclusion

Your investment would be affected hugely by both bull and bear markets. For this reason, it is crucial that you set out some time to observe how the market is fairing, when about to make an investment decision. Not that after a long term, the stock market frequently does post a positive return.

All traders ought to know about long, short, bearish, and bullish. These terms are adopted mostly in trading magazines, finance news, market breakdown, and everyday trading conversation.

They are as well adopted in all trades as well as on all time frames. Be it you are a day trader or investing securities or making forecasts on foreign currencies. Each time you view your portfolio or converse about investing, you will hear or read about these terms.

A long trader, also known as a bull, believes that there will be an increment in the price of one or more stocks. A stock trader is pessimistic that the price will fall and eliminate a huge amount of money. In a way, the two traders act based on emotion.

The short trader is controlled by the phobia of missing opportunity while the long trader is controlled by the phobia of losing money. The fact that these words are popular shows what important function traders’ emotions or sentiments portray in the purchase and sell dilemmas.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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