Understanding the difference between bull and bear markets

The world of financial markets exposes you to terms you may not have heard before, but aren’t particularly complex or confusing. “Bull market” and “bear market” are examples of this. They are frequently used to define the state of a particular market, while bullish and bearish are also used to describe a person's view on it.

If you are bullish, you expect the price to go higher and if you are bearish, you expect it to fall. As not everyone shares the same view, the market is in a permanent state of flux; bullish vs bearish traders who seek to profit on their analysis of the situation.

While the terms are most commonly used when discussing stock markets, they can still be applied to other asset classes. In forex CFD trading, for example, two currencies are compared against each other but pairs could be judged to be bullish or bearish based on the relationship between the two. If the euro is in a prolonged uptrend against the dollar, it could be deemed to be in a bull market, for example. Understanding what phase these instruments are in could be useful when trading them.

A bull market is when prices are frequently climbing and making new highs. It is said to derive its name from the motion a bull makes during an attack. It drives its horns upwards.

Bull markets in stocks generally occur during periods when the economy is doing well. Although that is not always the case as the last 15 years have shown. Large-scale quantitative easing and ultra-low interest rates enabled the longest ever bull market, during which the economy wasn’t always performing particularly well.

A bear market is the opposite of a bull market; it occurs when prices are falling. A bear market begins when the price of an instrument falls 20% from its highs. It is said to derive its name from the downward motion a bear makes during an attack, swiping its paws towards the ground.

Bear markets in stocks can signal that investors have become pessimistic about the economy and as a result, companies performance. Bear markets are often associated with an economic recession.

There’s no time limit on bull markets and the lack of a consensus on what defines the start of one means opinions differ on how long they last. But it’s widely accepted that the longest bull market in US stock market history occurred between 2009 and 2020. Even in bull markets, prices don’t rise all the time. In fact, markets will regularly experience corrective moves. It’s the scale of those corrective moves that determines whether a bull market is still live or if a bear market is underway.

Another term you may not be aware of that analysts and traders frequently use is “correction”. A correction is defined as being a 10% move in the opposite direction of the prevailing trend. In other words, a 10% decline in a bull market or a 10% rally in a bear market, although it’s more often used when referencing the former.

As the name implies, a correction doesn’t alter whether you’re in a bull or bear market. What’s more, it is frequently incorrectly used to describe corrective moves of less than 10%. The important thing is that they are counter-trend and the bull or bear market remains intact.

There are many catalysts that can cause corrective moves such as economic data, news, earnings announcements and much more. It can be caused by a combination of factors which influences overall sentiment in the markets.

Some instruments, such as equities, are deemed to be riskier and can perform better when investors have a higher risk appetite. Others like bonds can perform better when investors are feeling more risk-averse. These relationships don’t always hold true, but the concept can explain one reason why we see corrective moves.

Profit-taking is another reason people use to explain sudden corrective moves. That can be because an asset is deemed to have reached a consensus fair value, or a particular level that traders believe will encourage others to take the opposite position and push price in the other direction.

That can be a certain price level that looks like a big deal, like $2,000 in gold, parity in EUR /USD or $100 in WTI crude. Or it can be linked to a particular level on a chart deemed significant by technical analysts, like a 200-day simple moving average, or a 50% Fibonacci retracement level.

Technical analysis is a discipline in which investors use charts to study behaviour and trends. If enough people think a certain level will cause people to sell or buy, then it can become self-fulfilling.

One of the key advantages of currency trading over stocks or equities is the ability to go short if a trader anticipates a bear market, currency trading enables traders to buy or sell 24 hours a day, 5 days a week which is a major advantage over stocks trading which have limited hours and in some cases additional requirements to short the market. Also, the diversity of instruments offered on the trading accounts offers exposure to various markets, multiple currency pairs have high correlation with the stock market.

As you can gather, there are many reasons why prices fluctuate throughout any given day, week or month. Which is why investors like to take a broader view of the primary trend and understanding bull and bear markets can help them to do that.

And let’s not forget, the vast majority of people do not buy at the bottom and sell at the top. The reason why corrective moves remain just that is investors see the price adjust and either enter once more or for the first time. And the trend continues.

Changing fundamentals also mean that prices that once didn’t look attractive now do and vice versa. All of this and more ensures markets are always moving, although volatility can vary from time to time.

Now knowing more about bull and bear markets, you can take advantage of powerful technical analysis and risk management tools accessible on our OANDA Trade platform to find and manage opportunities quickly and effectively.

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