Charge or Sleep? Are you a Bull or a Bear?
Invariably, two of the most commonly used terms in describing financial markets are “bullish” and “bearish”. Itend to find them highly subjective but they are worth understanding because they can guide, and assist you,when analyzing market trends over time.The terms of being “Bullish” or “Bearish” are not particularly intuitive, regardless of whether you are an animal lover or not, so many new traders become easily confused and mistake one term when they might actually mean the other.
The simplest way to describe each:
Bulls: charge ahead and chase red flags
Bears: hibernate and prepare for a long winter
In order to better understand the major characteristics and differences lets break them both down.
What Is a Bull Market?
Simply put, a bull market describes an upward movement (or trend) in a specific market that is rising in value or is expected to rise in value in the future. References to bull markets were commonly used when discussing stocks, but the term also applies to all other asset classes (forex, commodities, bonds, etc.) as long as prices are seen to be gaining in value. But what causes these markets to rise? And how can traders make forecasts that a Bull market is looming on the horizon? The basic laws of supply and demand generally govern markets, prices in a currency pair will increase when supply of a currency (or other asset) decreases, or when demand for that same item increases. Typically, Bull markets are usually preceded by general optimism, upbeat expectations and trader/investor confidence. In the early stages, many of the market changes are psychological and may not or may not be accompanied by strong economic data. In the last year we were all very aware of the fact that US interest rates were going to rise. In this instance the demand for USD was strong or bullish. While this is not always the case in a bull market, it should be remembered that a great deal of activity in the financial markets comes as a result of psychological expectations rather than a strong performance that can be proven by solid economic fundamentals.
So what Is a Bear Market?
Conversely, a bear market shows a downward market movement/trend over time. In these cases, markets appear to be “in hibernation” and the prices in these markets are either in decline or expected to be in decline in the future. In bear markets, the increasing fear/pessimism and decreasing trader/investor confidence are the prevailing psychological determinants of these trends. As in the example above, the oversupply of a currency can see its value decrease and thus would be classified as a bear market. Notably the most famous historical bear market time period began after Black Friday in 1929, leading to the Great Depression when investor confidence stayed depressed for many years after.
Are We In a Bull Market or a Bear Market Right Now?
When comparing bull and bear markets, it is easiest to identify the overriding trend by simply looking at price activity itself. In FX, if currency pairs are posting successive rallies over time – higher highs relative to values seen previously – traders would say a bull market is in place. And vice versa. Many argue that we’ve been in a ‘somewhat cautious’ bull market since 2009. But most analysts describe investors today as a combination of cautiously optimistic and highly doubtful, at best! As traders we must remain alert as future interest rate rises, the value of commodities and shifting economic policies around the world will have an effect on currency pairs. Because a bull or bear market tends to be a longer-term classification, it is difficult to know in a given week or month where the global economy stands; it is much easier to label a market in retrospect!
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