The author is an expert in the field of multi-asset trading.
Bullish vs Bearish Markets – What’s the Difference?
As a keen trader or even just a light observer of the financial markets you’ve probably many times come across the expressions bullish market or bearish, and markets are often described as having a bullish or bearish sentiment. But what exactly does it mean when commentators proclaim a market to be bullish, or warn that the market tendency is bearish? Understanding bullish vs bearish markets is critical for a trader to navigate the different market conditions and realize their varied effect.
If you want to understand even more important terms and definitions, check out our complete glossary of trading terminology to become a more informed (and better) trader.
Bullish vs Bearish Explained
Professionals in the field of finance often refer to the markets as being bullish or bearish based on the general price movements being positive or negative. And when analysts throw around the term “bear market” or “bull market” they are describing whether a market is optimistic (rising or likely to rise) or pessimistic (dropping or likely to drop). The main difference between bullish and bearish markets is whether confidence is high and prices are rising or if it is low and prices are dropping.
More specifically, the terms bullish and bearish describe the actual state of the market – if it is gaining value, or in an “uptrend,” or losing value in a “downtrend.” These trends are usually affected by and reflect the emotions of the traders and whether they are buying or selling. Markets and asset prices will usually rise amid positive news and fall when there is bad publicity. Sometimes certain groups may attempt to influence the prices, but in a huge market such as forex this isn’t as feasible.
What is a Bull Market?
A bull market is a financial market (whether it’s currencies, metals or commodities) where prices are rising or are expected to rise. General optimism, investor confidence and expectations of continuous strong uptrends characterize a bull market. These uptrends usually last for weeks, months, or even years, but can be as short as a few days, depending on the surrounding circumstances. Predicting changing trends is sometimes difficult as trader psychology and speculator behavior can play a role.
Markets become bullish generally when the economy is doing well or coming out of a previous slump. For instance, individual currencies may rise in line with a strong GDP output, or drop when unemployment figures or interest rates aren’t favorable. Supply and demand forces still govern in a bull market, so weak supply but strong demand (as in the case of commodities such as oil or natural gas) will see prices rise as more investors want to purchase the asset than are willing to sell it.
What is a Bear Market?
A bear market is the opposite of a bull market. This market condition is characterized by falling prices and a generally pessimistic outlook. Traders begin selling rather than buying as they try to get out of losing positions, and the onset is usually bad economic news or figures such as low employment. The onset of a bear market also has to do with psychology, as traders who believe something negative will happen before it’s happened take action by selling assets to avoid losses.
A bearish market can thus become a self-fulfilling prophecy, where a large number of pessimistic traders may start a down-trend by actively selling off the asset by expecting the price to drop, but in effect cause the price drop themselves. This can cause others to panic and get out of their positions as well. This trend is reversed, however, when speculators come in and buy on the low and prices slowly rise again as traders are attracted back, leading eventually to a bullish market.
You can profit in both bullish and bearish markets
Traders who have knowledge of the conditions the cycles described above bring and how to navigate them, can take advantage of both bullish and bearish markets. When you understand the meaning of bullish and bearish, you can accurately identify the cycles and when and how to profit off of them. It is possible to make money during sinking markets, and no matter whether prices are rising or falling, a shrewd trader can come out on top.
By trading a popular derivative product called Contract for Difference (CFD) instead of buying the actual asset itself, you can profit off a decline in the asset’s price. The profit in CFDs depends on the change in the value of the underlying asset over time, and this means both an increase and a decrease. CFDs are all about the difference in price, where you can invest in high or low prices according to what you think is more likely to happen, be it a bearish market or a bullish one.
You can give CFDs a try in all market conditions by opening a free demo account and trading with $10,000 in virtual money.