Do you know how to trade during a bear or a bull market? Time to find out!
Both bearish and bullish markets offer considerable trading choices if you know which strategies are to use, and when to use them. Also, you need a solid plan, sharp focus, discipline, plus an overall heightened sense of self-control. Also, it’s crucial to always be aware of the risk involved in trading and take measures to control it.
This article will teach you what you need to know about the bearish and bullish markets. It will include information about how to spot the tell-tale signs and how you might need to adjust your trading strategies accordingly.
We'll start with the essentials: explaining these concepts.
What are bearish and bullish markets?
Falling prices characterize bear markets, and rising prices define bull markets. During bearish times, stocks are dropping, economies are losing momentum, and unemployment figures are going up. Bullish periods see stocks flourishing, economies gaining, and unemployment stabilizing and even decreasing.
Neither bullish nor bearish markets last forever because volatility keeps breaking their cycles. When prices fluctuate, and the markets swing from one direction to the other, you have more options for trading, but with increased risks as well due to increased uncertainty.
If you want to capitalize on either bearish or bullish markets, you need to be capable to figure out the distinctive signs, according to market analysts.
Indicators of bull markets and bear markets
Some of the signs indicating a bull or bear market are obvious and well-established. Still, it is essential to go through them for a better understanding of the phenomenon.
1. A prosperous economy / A declining economy
Growing GDPs, wage increases, low unemployment, positive consumer price indices, and producer price indices – these are all indicators of a healthy economy and a bullish market.
But a prosperous economy can’t develop in a healthy manner without the support of the political and social elements. If all these factors are in check, bull markets can flourish, and investors could capitalize and trade accordingly.
When economies start declining, that's usually a strong signal that we might be entering the bearish territory. Look for salaries falling, GDP growth slowing or even decreasing and economic indicators plunging.
2. Businesses soar/ Stocks plummet
Companies and corporations usually have a considerable chance of generating large profits during bullish markets, since the economy is healthy and robust. Even small businesses can capitalize on this and expand or generate more income.
However, when the bullish cycle comes to an end, the buying power reduces, and stocks begin to retract. Political, social, or economic developments can disrupt the bull market and prepare the ground for bearish territory.
3. Optimism in the markets and rising trend lines / Pessimism and falling trend lines
Traders are often very optimistic during bull markets; therefore, market analysts see the “market sentiment” as being a leading indicator to keep track of. Investments can potentially yield more money as stocks are booming, and investor confidence is sky-high. For this reason alone, trend lines usually go up, overcoming resistance levels.
But don’t let euphoria cloud your judgment. Trading requires your full attention, and dedication, no matter the circumstances. It's vital to keep a clear head and constantly analyze and adjust your portfolio, as the markets can make a 180-degree turn. Optimism can easily make room for pessimism, trend lines can turn downwards, and overall market sentiment can turn bearish. All that's needed is just a spark for ignition, like the Covid-19 pandemic, for example.
4. Indices grow at a steady pace / Indices experience substantial losses
During a bull market, indices grow at a steady pace, closing at higher highs in most trading days, according to classic technical analysis knowledge. Stock prices fluctuate as always even if the market is advancing, and individual prices can shift. Nevertheless, the overall stock indices will experience growth.
However, traders can’t determine with 100% precision the starting point of such a bull market. They can only recognize it from the stability of stock indices and other revelatory macro and micro economic indicators.
On the other hand, stock indices drop significantly during bear markets. A recent example is the downturn of U.S major indices since the start of the Covid-19 pandemic.
How and what to trade in a bear or bull market – general guidelines
In order to contain and limit risk exposure, most traders look for alternative ways of investing. One of these approaches is using CFDs. With CFDs, you have access to both a long approach and a short approach. Going long (placing a buy order) is ideal for trading in a bull market; opting for a short approach (placing a sell order) is the main choice during bear markets.
You won’t need to own the assets you want to invest in, as this form of trading involves anticipating their price movements. Plus, you can use leverage to increase your potential gains and your overall exposure, always keeping in mind that risks increase as well.
Learn more about trading CFDs with CAPEX.com! Visit our Academy, check-out our educational materials and resources designed to help you develop your own trading strategies, and gain valuable market information on bonds, shares, Forex, commodities, and other asset classes!
During bear markets, the traditional approach, according to market analysts, is to trade safe-haven assets: gold, the Japanese Yen, or the Swiss Franc, as their prices usually stay stable or even increase. Defensive stocks are another interesting option since they deal with indispensable products for the economy, such as food, common goods that make up the usual basket of products all of us use in our daily life.
During a bull market, the trading possibilities are numerous since entire market sectors experience growth. You could invest in indices, as they reflect the state of the economy or go for major stocks like Facebook, Amazon, Microsoft, or Apple. The choice is yours!
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Sources: Investopedia.com, babypips.com
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