Financial markets are ever changing. What is trending today can be completely irrelevant tomorrow. However, that does not mean that they cannot be analyzed, and that you, as a trader, can’t base your strategy on rationality. From a broader perspective, the two most prominent market conditions are a bullish market and a bearish market, where the price proceeds upwards and downwards, respectively.
That being said, traders can better forecast trading opportunities in both situations. However, it is essential to thoroughly understand what a bull or bear market is to capitalize on them efficiently.
Understanding the bull and bear markets
A bull market refers to a market state with a prolonged price increase – generally more than 20% from the recent lows. Bull markets are marked by high trader confidence with optimistic sentiments, strong economic growth, and a positive financial environment. When a bullish cycle begins, traders tend to buy and hold positions and utilize swing trading strategies to ride the long-term upward price momentum. The term “bull market” should not be confused with short-term bullish spurts or market correction phases, which last for a short while instead of an extended period.
In contrast, when a market experiences a persistent price decline by more than 20% from the recent highs, it is termed a “bear market.” The bear financial markets are characterized by waning traders’ expectations and confidence, a weak or sluggish economy, geopolitical crises, fearful sentiments, and disrupted supply and demand. However, traders can also take advantage of the falling markets by opening short-sell positions via several trading derivatives like CFDs, futures, and options.
Analyzing and trading the markets
Though it is difficult to determine the market phases in real-time or how long a trend is to last, technical analysisproviders such as TradingViewcan help traders capture various opportunities in both markets. Market participants can achieve sustained gains by analyzing the chart patterns and applying analysis tools or indicators.
For instance, technical price patterns like head & shoulders, and triple tops or bottoms, indicate a potential reversal of the present market phase. To cite, when a head and shoulders pattern appears at the top of a bullish trend, it manifests a diminishing power of bulls, implying an initiation of a bearish phase. Contrarily, patterns like flags and pennants specify the continuation of an existing market cycle, allowing the traders to place orders accordingly.
Key factors responsible for bull and bear markets
Generally, a bullish market occurs amid high corporate earnings, strong GDP, rising employment rates, and optimistic financial data, resulting in strengthened confidence. For example, a positive economic release related to USD can cause the relevant USD currency pairs and US stocks to rise in value. Similarly, a bear market can become apparent during a challenging economic period and a pessimistic financial environment, leading to fearful market sentiment. Such bleak conditions like reduced public spending and increased unemployment rates adversely impact the financial markets, pushing the value of relevant stocks, commodities, and currencies down.
Whether you favor a bullish or bearish market, each has its downfalls and risks. Understanding the fundamentals and technical aspects of the price movement is a critical skill to master for traders and investors.
