Bullish And Bearish Price Trends Explained
“Bullish” and “Bearish” are terms used to describe the overall price trend of a currency pair or asset. Learn how you can navigate these trends.
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- What’s The Difference Between Bull and Bear Trends?
- How To Identify Bull and Bear Trends
- How To Trade Bull and Bear Markets
- Bull and Bear Traps
- Safe Trading With Bulls and Bears
You don’t have to travel to Wall Street to find market “bulls” and “bears”. These terms represent specific price trends and are key to the development of your strategy and risk management. You’ll encounter bulls and bears in every market, from forex to crypto, stocks to commodities.
So how do you spot them? And how can you handle them safely?
What’s The Difference Between Bull and Bear Trends?
Bull and bear trends describe notable price movements in a specific direction. Essentially, prices move positively for bulls, and negatively for bears. In order to remember which is which, you can consider each animal’s preferred mode of attack: bulls charge and toss their horns up, whilst bears are more guarded and swipe downwards with their claws. In actual fact, the animals were pitted against each other long before the era of modern trading thanks to show fights staged by nineteenth-century Californian pioneers.
Another theory behind the origins of “bull” and “bear” terminology derives from an eighteenth-century proverb. “Don’t sell the bearskin before you’ve killed the bear,” was the warning given to bearskin traders. In other words, they were selling on the speculation that prices would drop. Around the same time, the term “bull” was adopted to describe traders who speculated in the opposite direction.
How To Identify Bull and Bear Trends
The bulls and bears aren’t necessarily in action every single time prices move up or down. Normally, true bull or bear trends display a price change of at least 20% over two months or more. Any movements smaller than this are classed as temporary market corrections. Indeed, fluctuations will still occur during an overall bull or bear run.
The momentum of the trends can vary according to the volatility of your chosen asset. Generally speaking, bull trends are characterized by prices moving between higher highs and higher lows. Conversely, bear trends will present lower highs and lower lows as prices slide downwards.
Technical analysis can help you pinpoint these movements and decide whether a trend is breaking out or faking out. For example, RSI and MACD indicators are helpful for measuring the strength of a trend. Candlestick patterns (such as hammers, hanging men, or shooting stars) can signify reversals and beginnings of new trends. And if you’ve really got a head for technical indicators, Fibonacci Retracements and Moving Averages can filter out short-term price fluctuations to clarify longer-term price direction.
How To Trade Bull and Bear Markets
In a bull market, you’ll want to buy early in the trend (low) and attempt to sell near the peak. In a bear market, you’ll seek to sell with the hope of buying at a low price later (like the bearskin traders).
If you’ve bought during a strong bull movement, your chances of suffering serious loss are fairly low as long as prices continue to climb. However, problems arise when asset prices plummet with no bottom in sight. In this case, you’ll need to manage your risk if you hope to wait for a rebound, and this is especially critical when trading with leverage.
Additionally, your chosen assets will have their own special bull and bear characteristics. Cryptos tend to be especially volatile, whilst shares and commodities are likely to respond to wider socio-economic pressures. This is where CFDs and forex offer you a specific benefit for trading bulls and bears: because you’re speculating on price changes instead of holding individual assets, you’re able to go long or go short according to the market direction!
Bull and Bear Traps
Just like their namesakes, bull and bear trends can be dangerous. Practically speaking, traders sometimes wait for minor price pullbacks to enter the market in slightly more favourable conditions. But sometimes the trend unexpectedly reverses and wipes out profits. These situations are referred to as “traps”.
For instance, in a bull trap, you might have gone long at a moment where a price drops slightly during an upward trend. Instead of resuming its upward trend, it suddenly plunges. This is caused by a lack of buyers to sustain upward price action; wary traders cash out as soon as possible and in turn trigger other traders’ Stop-Loss orders.
Safe Trading With Bulls and Bears
To avoid becoming ensnared in traps, it’s important to remain rational and eschew FOMO (Fear Of Missing Out) from your trading strategy. Avoid jumping into trades on impulse as soon as you see favourable corrections. And be especially wary of YouTube and Twitter commentators who promise gains “to the moon”!
Careful analysis and verification of trend movements will reduce your risk of being caught in a fakeout. However, if you do get trapped, well-placed Stop-Loss orders will prevent your margin from going into freefall. There’s nothing better than successfully riding a major trend, but there’s nothing worse than being caught in a catastrophic reversal!