Bull vs Bear -7 Things to Know
If you have started working with a Forex mentor or are taking a Forex trading course, you may have come across the terms bull market and bear market. These terms are used in the Forex market as well as in the stock market, and being familiar with the ins and outs of each term will help you learn Forex trading like an expert.
Origin of Terms
The terms bull market and bear market can seem very strange if you have not heard them before. When the market is bullish, it means the prices are rising. This indicates a strong and growing economy with many employment opportunities. When the market is bearish, it means prices are falling. Many businesses may not be as profitable as they once were, which can cause companies to lay people off (which then results in higher unemployment rates). You can remember these terms by picturing a bull and a bear, each poised and ready to attack.
- A bull will buck its head up in order to attack with its horns. This movement indicates that market prices are rising.
- A bear standing on its hind legs will swing its paws down in order to strike. This movement indicates that market prices are falling.
Technically, you can use the terms bull market and bear market to describe any rising or falling market trend. In financial markets, however, the terms are normally used only when prices have risen or fallen more than 20% from their previous point.
You might also use these terms to describe less significant (but still notable) market changes if you look at a price chart that displays a shorter period of time. For example, a trader using a 1-month price chart may consider the market to be bull or bear even when relatively small changes happen, which is very different from the experience of a trader who is looking at a chart that covers multiple years.
How to Detect Oncoming Bull and Bear Markets
Frequently observing the market trends can help you determine the current (and future) states of the market you are studying. Keeping up with news of your nation’s economy (as well as other economies worldwide) can help you estimate whether markets will be affected by current events.
- Example: The COVID-19 pandemic resulted in quarantines around the world, which required many businesses to close and workers to stay home. With buyers unable to visit these businesses and buy goods, a once-growing economy struggles to maintain its rising stock prices. As a result, prices fall, and a bull market becomes a bear market.
Unfortunately, there are not always clear signals that you can point to in order to confirm what the market will look like in a few days, weeks, or years. Financial markets change to reflect human actions, and it is impossible to predict what other traders may choose to do en masse.
However, if you are interested in learning more about market trends (and how to identify when prices may soon rise and fall), consider signing up for a Forex trading course from Guerrilla Trading. Ask your Forex mentor to tell you more about:
- Risk Sentiment
- The Relative Strength Index (RSI)
- Moving Averages (MAs)
- The Moving Average Convergence Divergence (MACD)
- Binary Options
What is a Bull Trap?
Many gas stations display their prices on large outdoor signs, and these electric signs frequently update as prices change. Let’s imagine that you drive past a gas station selling gas at $2.50 a gallon, and you instead wait until prices fall to $2.45 a gallon. This 5-cent decrease can make you feel like you are scoring a great deal, but your delight might fade if you drive by the same gas station the following day and notice the price as low as $2.25 per gallon. If this situation has ever happened to you, then in a way, you have experienced a bull trap in everyday life.
A bull trap occurs when traders believe (incorrectly) that the market prices have finished falling and that this is the best time to buy currency pairs at a low price. Traders expect that prices will quickly rise again and allow them to turn a profit by trading off their new currency pairs. If prices continue to fall instead of rising, traders may end up with currency pairs they don’t want to sell because the low market prices will cause them to lose money as a result.
Because of the way a bull trap works, it can force traders to hold onto currency pairs for a long time without making a profit, as it may be impossible to know when prices will rise again. Even when prices rise, many traders may not be able to make back a profit if the currency has not risen to a strong price again.
Bull traps are created when institutional traders buy bulk amounts of currency pairs to trick other traders into believing that prices will soon be rising and that this is the best time to buy the currency pairs in question. Usually, traders set bull traps when these currency pairs will not be rising in value any time soon. As a result, smaller traders are eventually forced to sell their currency pairs (often at a loss), allowing large traders to sell off their bulk amounts of currency pairs at a higher price.
What Is a Bear Trap?
A bear trap can fool traders into believing that they have found the best time to sell their currency pairs and make a profit because market prices are high. Imagine that you are selling goods at a festival or bake sale for a reasonable price. During the event, you discover that your neighbour is selling the same items for much higher. You have experienced a form of bear trap in everyday life because you are missing out on the profits you could be getting.
While neither trap is a good one to be caught in, many people consider bear traps to be better than bull traps as you can still be pleased with the profit you made by selling your currency pairs. However, if prices keep rising higher, it can be disheartening to think about the money you missed out on by selling your currency pairs early.
Bear traps are created when institutional traders sell their assets (such as currency pairs) to intentionally fool other traders into believing that market prices will not go any higher. This can cause other traders to sell their currency pairs, too, allowing larger traders to buy up all the newly traded currency pairs and sell them for a higher profit when the market continues to rise.
Which Market Is Best?
Each market has its benefits and weaknesses. If you are looking to buy assets, a bear market is an excellent time to consider your options, as it means prices are falling. If you are looking to sell, then you’ll want to watch for signs of a bull market, as rising prices indicate it may soon be the best time to sell.
The great thing about the Forex market is that traders like you can trade currency pairs in both bull and bear markets and still make a profit. The Forex market requires you to trade currency in pairs (for example, USD/CAD is the abbreviation for the U.S. dollar and Canadian dollar currency pair). This means that when one currency is growing weaker on the market, the other is growing stronger in comparison.
- Example: Imagine you are trading with the USD/CAD currency pair. When the value of the U.S. dollar is falling, you are able to buy more of it at a lower price. You can also expect to trade your Canadian dollars to receive more USD in return than you would be able to if the dollar amount was fixed at a 1:1 exchange rate.
As you learn Forex trading, you will soon see that it is always important to watch the market if you hope to make a profit by trading currency pairs. Even when your nation’s economy is doing poorly, it doesn’t mean that you should give up on Forex trading altogether. Understanding market trends will help you determine the best times to trade your currency pairs in the Forex market.
Consider taking a Forex trading course to dive into a deeper explanation of market trends and what they mean. You may also wish to consider hiring a Forex mentor to receive a more personalised, one-on-one trading experience.
Bull Market Rallies
When the market is bullish, people are looking to invest their money. They are more likely to take risks and may believe that they will soon make a lot of money off their investments. A rally occurs when prices quickly grow and continue to grow (or maintain their height) for a significant time. Generally, a rally follows a period when prices are declining or flat.
A rally indicates a rapid change in the market, usually caused by growing demand for a service or product. When the Forex market has a large number of buyers who are looking to purchase currency pairs but has few traders who are looking to sell, then a rally is likely to occur. Demand is high and supply is low, so many buyers are willing to purchase currency pairs at higher prices than usual. When a rally is sustained, it can lead the economy into a bull market.
Bear Market Phases
There are usually four distinct phases in a bear market that you should watch for:
- Expansion – During this phase, prices are high and so is investor sentiment. This phase sits at the tail end of a bull market when people still believe the market to be excellent. Many people trade for profit but are not highly concerned with the chance of losing significant amounts of money.
- Peak – A new phase emerges as traders begin to exit the market by selling off their currency pairs. Profits and prices start to fall. As a result, some traders grow anxious and rapidly sell their assets off.
- Contraction – In this phase, speculators enter the market and start trading currency pairs. This can cause the trading volume to rise, along with prices. Slowly, the market begins to rebuild its old momentum. However, a large portion of the market is still experiencing falling prices.
- Trough – A “trough” is the low part of a wave, and as you may expect, this phase of a bear market describes a time when prices continue dropping. As time goes on, however, the falling prices will begin to slow. These low prices attract traders looking to buy cheap currency pairs, which they plan to hold onto until prices rise again (and these traders hope they do not fall into a bull trap in the process). As trading continues and economies begin to strengthen, bear markets can again become bull markets. This leads the cycle to start anew.
If you have decided you are ready to learn Forex trading, you’re in the right place. Guerrilla Trading offers a Forex trading blog and a variety of free resources to help you learn Forex trading fast. We’ve compiled our resources online so we can help beginning traders learn Forex trading quickly, easily, and on a budget. If you are interested in diving deeper into the world of trading, we can also help you find an excellent Forex trading course to study from or a Forex mentor to work with personally.
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