Markets can either be trading in a certain direction termed ‘Trend’ or moving sideways. A trending market can further be categorized under uptrend and downtrend. The former is referred to as a Bull market and the latter, a Bear market. Even though people think that trading in a trending market is best due to the specifics of conditions of both market, one can perfectly trade well in a moving sideways market.
A Bullish and Bearish Market
A Bullish market is a market that remains in an uptrend for a long time while prices keep pushing higher. For a market to qualify as a Bullish Market, the prices would have to be in an uptrend position for a long period of time as short term uptrends or single bullish sessions wouldn’t qualify the market to be called a bullish market. This term was coined from the way Bulls use their horns to pick up their prey from off the ground which is similar to the rising prices in the market.
A Bearish market refers to a market where the prices are constantly falling. Just like the illustration with the bullish market, a single session of falling prices or a downtrend session for a short period of time would not qualify the market to be a bearish market. Similarly, just like the analogy of how bulls attack their prey, the bearish market got coined from how bears attack their prey; by pushing down their prey with their paws, so are prices in the bearish market.
Identifying a Bullish and Bearish Market
Both markets are easily identified with a price-chart. A bullish market is characterized by higher highs and higher lows, with each higher highs exceeding the previous one and each higher low forming a higher bottom than the previous. The diagram below simply illustrates this
Do you notice how the price occasionally falls as it tends upward? This is called A Price Correction and it doesn’t represent a bear market. As far as the market keeps forming fresh higher highs, then it’s a Bull market.
Takeaway: Price corrections occur in both the bull and bear markets. They are normal formations that reveal counter-trade movements, caused by profit-taking activities, overreaction to news or simply some large non-price sensitive orders that push the price against the underlying trend.
In the same way, Bull markets are similar to bear markets but just in an upside down manner. In this market, the price continually forms lower lows and lower highs, with each lower low exceeding the bottom of the previous lower low and each lower high forming a lower top that the previous one.
Major Differences in Trading Bull and Bear Markets
The major differences between trading bull and bear markets include:
- Speed of action: While the bear markets seem to occur fast and sudden, the bull market builds up slowly and gradually.
- Short-selling: This is the only way to profit from a bear market.
- Possibility of high losses: The bull market usually has a loss potential if you’re buying into it. Bulk of the time, the lowest a price can fall is $0. However, in the case of a bear market, you’re able to short sell as you have limitless potential losses theoretically because the price would keep pushing against you.
In conclusion, identifying the current market condition is not always a simple task, as markets can trend upwards on some timeframes, and downwards at other timeframes. The key is to stay consistent with a timeframe of your choice and have strict risk management guidelines in place to limit your losses when the price goes against you.