Bull and bear markets have been around since the dawn of time, but traders have constantly struggled with using them within their trading strategy.
Before we begin, you must understand what a bull market is and a bear market.
Bull markets
A bull market occurs when prices are constantly rising, which means you want to buy now before the price increases even more if you see an opportunity for profit.
The term ‘bull’ comes from the way bulls push up on their front legs to appear strong – like they could charge at any moment towards anything that got in their way.
It represents stock or price movements pushing higher.
Symmetrical triangle
Before you read further, you must understand what a ‘symmetrical triangle’ is.
The top of the triangle represents resistance, while the bottom of the triangle represents support. When price moves above resistance, this is considered a breakout or breakthrough.
When trading in bull markets, traders would buy at support and sell at resistance, targeting predetermined targets that they have determined through statistical analysis (in other words, charts).
The central concept behind trading in bull markets is momentum-based, meaning the more stocks move up at a price, the more likely they will break resistance levels or continue to make higher highs/lows.
It also means that when prices are moving downward quickly, this is a great time to buy at support or scale into your position.
Trading against the momentum (trend) is known as counter-trend trading, where you would be entering market orders to short sell every time stocks make higher highs/lows if you were following the trend.
If you are not educated on short selling, traders look for securities they think will decline in price and sell them now (known as ‘borrowing’).
If prices decline, as they expect, they can buy back their securities at a lower price than what they sold them for initially.
The trader gets the difference between the purchase price and the sale price of the security minus any commissions paid.
Sometimes traders use leverage when implementing their strategy, which increases the size of each trade by a certain multiple.
Bear markets
Trading in bear markets is much different from trading in bull markets, but it requires the same attention to understand what traders want from your strategy.
A bear market occurs when prices are constantly declining, which means you want to sell now before the price decreases even more if there’s profit to be had.
The term ‘bear’ comes from the way bears place their paws on other animals to immobilize them – this represents stock or price movements pushing lower.
When trading in a bear market, traders would short at resistance and buy support, targeting predetermined targets that they have determined through statistical analysis.
The central concept behind trading in bear markets is momentum-based, meaning the more stocks move down at a price, the more likely it will break support levels or continue to make lower highs/lows.
It also means that when prices are moving upward quickly, this is a great time to sell at resistance or scale out of your position.
Trading with the momentum (bearish trend) is known as counter-trend trading, where you would be entering limit orders to go short every time stocks make higher lows/highs if you were following the trend.
If you are not familiar with shorting, traders look for securities they think will rise in price and sell them now (known as ‘selling’).
If prices rise, as they expect, they can buy back their securities at a higher price than what they sold them for initially.
The trader gets the difference between the purchase price and the sale price of the security minus any commissions paid.
Sometimes traders use leverage when implementing their strategy, which increases the size of each trade by a certain multiple.
For more information check out forex trading UK.
Leave a Reply