What is the main concept every beginner trader has to learn before making the first deal? Many would argue that it’s the difference between the bull and bear markets. It’s critical to understand which way the market is going to pick the right strategy and get great results. In this article, we will explain what bull and bear markets are and cover some of the main strategies for trading bull and bear markets.
What Are Bull and Bear Markets?
These terms are usually used to describe the current condition of the financial market. In a bull market, the economy is growing and share prices are going up, attracting investors. A bear market is the opposite: this is when the economy is slowing down and prices are declining.
You can also refer to these concepts when discussing market sentiment toward specific assets. In general, the market sentiment is considered bullish when the price is rising. And bearish if the asset price is in a decline.
Both bull and bear markets can offer exciting trading opportunities. There are many people who prefer trading bullish market by opening long positions and waiting for the prices to go up. Yet, the bearish market can be a good place to try going short and benefiting from short-term price fluctuations. The key to success is choosing the appropriate trading strategy to benefit from specific market conditions.
Bull Market Example
In general, in a bullish market, the demand for an asset is larger than the supply. This is because many people expect the price to increase, so they are willing to buy it. As a consequence, the price goes up. However, the growth usually stops at some point, so it’s important to catch the right moment to exit a deal with profit before the trend changes.
The market is usually considered bullish when the stock price increases by 20% or more from the recent lower figures.
Bear Market Example
The bearish market may be identified when the economy is slowing down and the asset prices decrease. People are not willing to invest money in falling assets, many want to sell, so the prices go down. Similarly to the bull market, you may refer to the 20% price decline value to identify the bearish trend.
How to Trade in a Bull Market?
There are different bull market trading strategies that you can try out. Here are a couple of basic approaches that may get you started.
Buy and Hold
This is one of the most basic and straight-forward bull market trading strategies. It involves opening a long position and waiting for the price to go up. Once it reaches a certain price level, traders then sell it and keep the profit. This bull market trading strategy may work if you are fairly certain that the asset price will increase in the near future.
With this method, it’s critical to stay cool and stick to your plan. Many traders keep their deals open for too long hoping for the price to continue growing and miss the right moment to close the trade. To avoid this, you can use the take-profit and stop-loss feature. It may help you get the most profit and reduce potential losses.
Increased Buy and Hold
This bull market trading strategy is similar to the previous one, but it has a twist. You not only keep your current trades open until the asset price reaches a certain level, but also add new ones whenever the price grows a few points. This method may significantly increase your final gain; however, it involves additional risk, especially with margin trading. So you should carefully weigh the risks and consider different outcomes before making any trading decisions.
How to Trade in a Bear Market?
When it comes to bear market trading strategies, the main one is short-selling. This approach offers you an opportunity to profit from a falling market. If you trade CFDs (Contract for difference), there is no need to buy the underlying asset – you just trade the price difference. This means that you can open either long or short positions depending on market conditions. In case of short-selling, you just open your deals expecting the asset price to go down.
Similarly to the bull market trading strategies, this one requires a certain level of self-control. You should plan your moves beforehand and try to avoid spontaneous decisions. Using risk-management tools such as stop-loss is also highly recommended.
When trading bull and bear markets, it’s important to catch the right moment to exit a deal before the trend changes. To achieve this, you can turn to technical analysis tools, such as trend lines and indicators. For instance, you can try using the Fibonacci lines to evaluate the current trend and decide whether a price reversal is coming up. This tool can help you pick the optimal time to enter or exit a trade and benefit from the bull or bear market while they last.
Summing Up
Every trader should know the answer to the question “What are bull and bear markets?” to make accurate trading decisions. There are different trading strategies for both market conditions: the key is to pick the one that will work best and stick to it. To identify the optimal time to enter or exit a deal, you can apply technical analysis tools. They may help you catch trend reversals and benefit from the trading opportunities bullish and bearish markets can offer.
