How to Trade in A Bull or Bear Forex Market

Bulls and Bears are common terms used in financial markets to describe the price movements of the market and overall market sentiment. These terms appeared on the stock exchanges but quickly came into common use in most financial markets, including Forex.

One of the key benefits of forex trading is the opportunity it offers traders in both bull and bear markets. Bull and bear markets are important to pay attention to as they can determine currency market trends. In this article, we will explain the meaning of bear and bull markets and look at how to identify the two market conditions.

What Are Bull Market And Bear Market

The terms bear and bull markets are used to characterize the general direction of markets. Simply put, a bear market is one in which prices are heading down and a bull market is used to describe conditions in which prices are rising. 

In a bull market, price goes up and investors feel bullish because they expect prices to continue to rise on the back of a bullish market and they anticipate selling high in the future. A bull trader opens long positions, thus increasing demand and raising the price of a trading instrument.

In a bear market, price goes down and investors feel bearish because expect prices to continue to fall on the back of a bearish market and they anticipate buying low in the future. Bears sell their assets to buy them cheaper in the future.

Bull market characteristics:

1. Investors are optimistic

2. The economy is expanding

3. Asset class returns are positive

4. More confidence in the markets

5. Good for the economy

Bear market characteristics:

1. Investors are pessimistic

2. The economy is contracting

3. Asset class returns are negative

4. Less confidence in the markets

5. Bad for the economy

Differences Between Bull And Bear Market

1. The economic and market conditions they describe

The main difference is that bull markets describe situations where asset prices move upward, while during bear markets, the prices move downward. Or in other words, the bullish state indicates positive market momentum, while the bearish one indicates a negative movement.

2. Factors that cause the markets

Factors that contribute to a Bull market include: the country has a strong economy with high GDP, unemployment is low, inflation is under control, positive market sentiment and aggressive buying and confidence that economic growth is sustainable.

Factors that contribute to a Bear market include: country’s economy is showing signs of declining with weak GDP, unemployment is high, inflation is growing, negative market sentiment and aggressive selling and lack of confidence in the economy and stock prices.

3. Investor behavior during both situations

During bullish market periods, investors are more confident in the profit adopt a looser approach. They tend to be more active and willing to invest in riskier assets. That is because the economic terms are favorable, and lost capital can be regained quicker.

But in bearish market periods, investors are less confident in the profit opportunities and tend to be less active. One of the main reasons for this is the increased volatility and market uncertainty.

How to Identify A Bullish And Bearish Market

As a trader, you need to determine the bear or bull market when it happens. Apart from the decline or rise in the price of assets, there are various other indicators which will help you in determining whether it is bull or bear market.

1. Stay updated with the latest financial news

The news and journals are an excellent source to understand the behaviour of the market and traders. Many interviews of traders and analysts publish in these newspapers. Along with this, you can also read various financial magazines. Reading regular news cannot help alone; after reading, it is important on your part to connect various dots to make a profitable decision. In addition, there are some newsletters which provide you with information on the trading sentiment of traders in the market.

2. Use technical analysis tools

Forex traders can use an array of technical analysis tools to gauge market sentiment and to anticipate currency behaviour when markets are transitioning from Bulls to Bears, and vice versa.

The two most common technical analysis tools for identifying Bull and Bear markets are price charts and the Moving Average (MA)

Some traders make use of mathematical and statistical information, price action and some evaluate several newsletters and compare negative and positive recommendations. The change in absolute data of these tools over time can tell traders where the market will move in future.

3. Oscillators and Relative Strength Index

One of the most suitable types of technical indicator which measures bearish and bullish momentum indirectly is the oscillator. It provides all the information required to understand how traders feel about the financial market.

Another such technical indicator is the Relative Strength Index or RSI. It relates the number of sold assets with the number of bought assets. The aim of this is to determine where the capital is flowing out of an asset or into an asset. It also helps traders to understand the investors feeling about the market without the need to ask each trader.

Conclusion

Bull and bear markets are important to pay attention to as they can determine currency market trends. By being aware of market trends, can help you to make the best decisions of how to manage risk and gain a better understanding of when it is best to enter and exit your trades.

To sum up, the sentiment of the market participants strongly depends on the exchange rate dynamics. When the bearish trend is observed, traders start selling actively, and prices fall. When the bull trend changes the bearish one, traders start buying to resell at a higher price.