CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Bull and Bear Markets - Everything You Need To Know

Reading time: 7 minute(s)

If you want to take investing seriously and achieve good results in investing, you need to understand the terms bull and bear market.

What do these two terms mean? A bull market and a bear market refer to price movements in the market, each of which expresses the opposite of the other. The main purpose of these terms is to give investors a quick and easy overview of what is happening in the market at any given time and to determine whether the trend is up or down.

What does a Bull Market mean?

The reference to the bull in the investment context comes from the analogy of a bull attacking its victim, picking up its horns and moving it upwards. Similarly, bullish investors try to move the price of a stock or other financial instrument upward through buying and accumulation. The symbolism of the bull is used in the investment world as a comparison to positive and upward market sentiment. A bull market is associated with optimism, rising prices and strong demand for an asset.

There are several indicators that suggest that the market is in a bullish trend. Among them:

  • A price rise of 20% from the previous low (often after a previous 20% fall and before a subsequent 20% fall).
  • Reaching an all-time high price.

A bull market is typically associated with a period when the economy is strengthening and markets are thus rising. However, identifying a bull market is not always easy and quite often it is only recognised after it has ended or peaked.

Generally speaking, a bull market is manifested on the charts by certain characteristics that indicate a rising trend and positive sentiment in the market, such as rising price levels, a rising price support line, increasing trading volume, or crossing key price levels. A bull market occurs after the end of the previous bear market, which is characterised by a downward trend. A new bull market begins after the market reaches its low.

How to trade Bull Markets? 

Bullish Market

Bull market trading involves taking advantage of the uptrend and upside potential in the market. Here are a few strategies you can consider when trading bull markets.

Purchase of shares 

A bull market is often accompanied by a rise in company share prices. Investors may consider buying individual stocks with a positive outlook and strong growth potential, depending on the economic situation in the market and considering them for medium to long-term holding.

Care should be taken, if you are buying so-called growth stocks, that they are known to be expected to have higher than average increases in value than the average increase in the market or sector of companies. These stocks tend to be much more volatile than the average stock and thus react more quickly and, more importantly, more strongly to fluctuations and changes in market sentiment. In this case, it is a higher risk investment and consideration should be given to diversifying the portfolio if necessary.

Buy and hold strategy 

A buy and hold strategy is a long-term investment strategy in which an investor buys investment assets, such as stocks, ETFs or cryptocurrencies, and holds them for an extended period of time without buying or selling them frequently. This strategy uses the assumption that the markets will generally rise over the long term and the selected investment assets will also rise in value.

However, it often happens that the market enters a downward trend. However, even in these situations there is an opportunity to stay in the market and retain your position. Indeed, a long-term view shows that the market can often turn around and investments can return to their original value and grow again.

It is important to remember that short-term declines do not necessarily mean permanent decline. Historically, it has been shown that the market usually goes through cycles and even periods of decline can be followed by periods of growth. Therefore, it is important to have a balanced portfolio and investment strategy that takes into account the long-term potential of the market and minimises impulsive decisions based on short-term fluctuations. High quality and carefully selected investments can offer the opportunity to prosper even in times of market downturns, provided that the approach to investing is based on a long-term perspective and conscious monitoring of fundamentals.

Remember that the buy and hold strategy is suitable for long-term investors who regularly buy assets or use the DCA (Dollar Cost Averaging) method and do not follow the market regularly.

What do you need to know when you want to trade Bull Markets? 

If you decide to trade bull markets, it is important to have some knowledge and information to help you create a successful strategy.

Risk management 

Managing risk is as important to investing as having the right investment strategy in place. Setting loss limits, using stop-loss and take-profit orders and sensible capital allocation are important elements when trading in a bull market. If your risk management is set up well, it helps to protect your capital and minimise losses.

In the case of a stop-loss order, it is the closing of a position if it has reached a certain level of loss. In the case of a take-profit order, it is closing the position after reaching a certain level of profit.

Emotional stability 

A bull market can be accompanied by short-term market fluctuations and corrections. It is important to have emotional stability and not allow emotional reactions to influence your investment decisions. Trust your plan and strategy and let objective factors or analysis guide you.

News and education

Continuous monitoring of current events and news affecting the markets is important for timely reaction to changes and identification of new opportunities in the bull market. We, therefore, recommend following verified information. At XTB, you can use our analytical news section, where our analysts track the most important market information for you, or use our YouTube channel.

What is a Bear Market? 

A bear market is the opposite of a bull market. It is characterised by a downward trend in the market over an extended period of time. During a bear market, asset prices generally decline and investors tend to be cautious and pessimistic about the future development of the market. If the market experiences a decline of at least 20% from the last market peak, it is a bear market.

A bear market can be caused by a variety of factors, such as an economic recession, geopolitical tensions, poor company performance, or negative market news. Investors fear losing the value of their investments and often try to reduce risk by selling their assets.

How to recognise a Bear Market? 

The identification of a bear market is based on a decline in prices by a certain percentage from their peak. The most commonly used criterion is a price decline of 20% from the peak.

During a bear market, it is important to be cautious and have an appropriate investment strategy. Some investors may take advantage of short-term speculation on falling prices, while others focus on protecting their capital and maintaining a long-term perspective.

Very often, however, a bear market can only be identified when it is at its end and has reached its low. Many investors, especially beginners, thus enter the bear market late, i.e. at a time when the market is turning bullish again.

It is important to remember that a bear market is part of the natural market cycle and can be followed by a rebound and the onset of a bull market. Long-term-oriented investors often use a bear market as an opportunity to buy quality assets at lower prices.

How to trade Bearish stock markets? 

Trading in a bear market, when stock markets are trending downward, can be challenging because investors often face a greater risk of losses. However, there are some strategies that can be used during a bear market.

Short term trading 

If you are experienced in short-term trading, you can take advantage of price drops and profit from short-term market movements. However, this approach requires quick decision making and active market monitoring.

At XTB, you can use a Contract for Difference (CFD) for short-term trading, where you can also use leverage and you won't need as much capital to open a position.

Strategy of gradual sale and purchase of assets 

The strategy of gradually selling and buying positions is an interesting approach for trading in a bear market. Investors can use this strategy by gradually selling a portion of their long-held positions when the market moves into a bearish trend, and waiting to buy on occasion when the market is expected to reverse back into a bullish trend. They then reopen their long positions at a lower price, allowing them to record higher profits.

The advantage of this strategy is that investors do not have to open short selling positions, which is usually associated with higher risk. By gradually selling and buying positions, they maintain their exposure to the market while taking advantage of price declines to maximise profits.

Consistent selling and buying of positions requires careful market monitoring and trend analysis. Investors should also have set rules for selling and buying positions to minimise risk and improve their results.

Conclusion 

Understanding both concepts is very important for your future trading in the market. Both bull and bear markets are natural cycles in investing and can alternate between different time periods. It is important for investors to be able to recognise and adjust their strategy according to the current market environment. Portfolio diversification, careful analysis, and a disciplined approach are key factors for successful trading in both types of markets.

FAQ

A bear market is a term used to describe a period of declining prices and pessimism in the financial markets. It is characterised by a sustained downward trend, with investors generally selling and having a lack of confidence in the market.

A bull market refers to a period of rising prices and optimism in the financial markets. It is characterised by a sustained upward trend, with investors generally buying and having a positive outlook on the market.

The duration of bear and bull markets can vary. Bear markets tend to be more volatile and can last for several months to over a year. Bull markets, on the other hand, can last for several years, with some even extending for a decade or more.

Bear and Bull markets are influenced by a combination of factors, including economic conditions, investor sentiment, geopolitical events, and market fundamentals. Factors such as economic recessions, high unemployment rates, and negative news can contribute to a bear market, while strong economic growth, low unemployment rates, and positive news can contribute to a bull market.

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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