What is the difference between a bull and a bear market?

Bull and bear markets are a big part of the world economy and its different market conditions. Both can be useful for investors trading in financial markets like stock indices, currency trading markets, or the cryptocurrency space. At the same time, they can be exciting and scary, but what is the difference between bull and bear markets?

They are both market types that are very common in the financial markets during an economic cycle. A bull market happens when the prices of financial assets increase over a sustained period of time. Conversely, a bear market happens when asset prices decrease over a sustained period of time.

Generally in a bull market, traders should buy instruments to make money from an increase in their price, while in a bear market, they should sell the holdings of their instruments because there will likely be a decrease in price.

The terms "bull" and "bear" come from old English culture where bulls were considered powerful animals that represented optimism whereas bears were seen as negative symbols due to their hibernation habits which symbolised pessimism.

The characteristics that make up bull and bear market types differ greatly, and determining the difference between bull and bear markets can be difficult to understand for beginner traders. In this article, we’ll break down everything you need to know about bullish sentiment and bearish sentiment.

What is a bull market?

A bull market is an economic upturn characterised by increasing employment, strong economies, and increasing GDP (gross domestic product). This is the opposite of a bear market which has fewer job opportunities, lower salaries, and decreased corporate gains due to increased competition. The beginning of a bull market may be difficult to spot but typically, bull markets follow periods of slowdowns or recessions where prices have become very low.

What happens in a bull market?

When a bull market is happening there is general optimism among investors that prices will rise further, with the number of buyers overwhelming the number of sellers.

What is a bear market?

A bear market is an economic downturn that can lead to a major drop in stock prices, forex pairs, commodities, and other financial instruments. This occurs when the unemployment rates are high, more people withdraw from the labour force, declining wages, or lower corporate profits due to increased competition.

What happens in a bear market?

Bearish trends typically last longer than bull markets which have shorter duration periods, with the number of bearish traders (sellers) overwhelming the number of bullish traders (buyers).

What is the difference between bull and bear markets?

The most significant difference between bull and bear markets can be summarised as a difference in directional views. Bull markets are when prices are rising because of stability, while bear markets are associated with dropping prices due to instability.

A bullish market is when prices are going up and a bearish market is the opposite, where prices are falling. This difference can be seen over time in different types of trading charts, in which one line goes up while the other falls.

More specifically, the terms "bullish" and "bearish" describe the state of a market in relation to its current direction. Specifically, if it is gaining value, moving up (uptrend), or losing value because its movement is going down or declining in value (downtrend).

How long do bear markets last?

A bear market can vary in length but can last from a couple of weeks to an average of two years. It takes much longer to recover from a bear market than it does for a bull market to reverse direction because investors and traders need more time before taking high-risk trades again.

How long do bull markets last?

Bull markets can last as long as six years and sometimes longer, with an average length of five years. The longest bull market has lasted over 10 years.

How did the bull and bear markets get their names?

The bull and bear markets get their names from the way these animal movements appear to people. 

The bull market is the one that appears strong and powerful, rising in value. When the bull attacks it starts from a low point swiping up to a high point. A bear market looks as if it's moving down from a high point, with a bear's attack swiping down from high to low.

Characteristics of bullish vs bearish markets

Discover the main difference between bull and bear markets below:

Different market types

While bullish and bearish are the major market types commonly known to traders and investors, Van Tharp, world-renowned author and trading coach said he’d identified about 25 different market types. However, he said traders should be primarily concerned and familiar with six main market types, which he described as:

• Bull normal: Generally suited for trend-following traders who prefer to buy and hold for the medium to long-term
• Bull volatile: The bull volatile market type calls for a more active trading strategy to ensure you stay on top of market movements as prices fluctuate
• Bear normal: The opposite of a bull normal market and may suit those who want to sell and hold until the trend reverses
• Bear volatile: The opposite of the bull volatile market and may suit those who want to participate in a more active market on the short side (going down)
• Sideways quiet: It’s been said that markets move in 3 major directions; up, down, and sideways. Markets that move sideways require a much more patient approach compared to markets on a definitive up or downtrend. Sideways moving markets can be precursors for breakouts (both on the upside and the downside).
• Sideways volatile: Slightly similar to the sideways quiet market, this type may suit those who are looking for a range of trading opportunities. Bollinger Bands can be an effective tool to use to track the price ranges of particular currency pairs and other instruments you want to trade.

As you can tell, each of these different market types would call for different trading systems. And as you consider the different tools you use for trading, it may also be useful to analyse what’s stopping you from using the right tools for your forex trading.

Knowing the different market types and the corresponding price movements and directions is also helpful in finding the most suitable market that matches your trading personality.

When does a market change from bearish to bullish?

A market changes from bearish to bullish when lower prices begin to go up and start trending higher. The opposite of that is true as well, a market will switch from bullish to bearish if its trend moves down and continues downward over time. It is a trader’s job to know which style of trading best fits their investing needs during each market type. 

A bear market will eventually end after a large-scale economic event. The pressure coming from sellers in that type of market will ease and turn bullish as the bears begin to run out of steam. It is nearly impossible to spot while the change is happening.

Can you profit in both bullish and bearish markets?

It is possible to profit in both a bull and bear market but it requires different trading strategies. 

Bullish traders typically buy stocks when the market is trending upward and sell them off when they start to decrease in value, which leaves profits on their hands during a bull run. Bearish investors normally do the opposite by selling shares of stock after it increases in price and then buying more once it reaches its low point again.

When trading CFDs, traders have the option to go long or short. This means, if they believe the market is trending in a bullish direction then they can open a long position. If they think the opposite, and they believe the market is bearish, then they can open a short position. This gives traders the opportunity to make profits in both bullish and bearish markets.

How can you trade bullish and bearish markets?

When trading in either market direction, it is crucial to be aware of both bullish and bearish continuation and reversal patterns. Being able to identify these price action patterns will provide an edge to your trading strategy and show potential opportunities in a rising or falling market.

Some of these patterns include bullish and bearish triangles, wedges, cup and handle, double top, double bottom, and Quasimodo.

Learn about the different types of continuation and reversal patterns, and bullish and bearish candlestick patterns to improve your knowledge analysing the charts.

Traders should also follow different technical indicators during bullish and bearish markets. Some of the indicators include moving averages, the bullish and bearish percentage index, and the volatility index (VIX).

Using different trading tools for different market types

No doubt you must have heard the saying about ‘using the right tool for the right job’. Whether you’re trying to finish a project at home or in the office, you will most likely get positive results if you use the right tools for the job.

The same is true with forex trading, index trading, commodity trading, and so on.

You need a bullish trading system (the right tool) to ride a bullish market. And the same when markets have turned bearish. You need to use a bearish system to capture the downward trend.

While that may sound simple enough and the only obvious thing to do, the reality may be different for many traders. Most people tend to use one tool (and not always the right one) for all jobs. They think one tool for all types of jobs will do the trick. It’s like using a driver instead of a putter when you’re trying to get the golf ball in the hole when you are on the green.

Why do you need different tools for different market types?

When it comes to forex trading, the question is why do people use the same trading system even if market conditions have changed and the market has taken a new direction?

Before we consider the different market types and what strategies you can use for each, one important thing to keep in mind is markets tend to move in at least three different directions: up, down, and sideways.

And as you no doubt know already, even in an upward trend some markets tend to pull back and then retrace. Similar moves can happen on a downtrend when some markets can bounce back up before dropping lower again.

Knowing that markets move up, down, and sideways is the clearest indication that traders need different trading systems (the right tools) for different market types.

There is no point in holding on to your bearish trading system when the market is running bullish and vice versa.

Conclusion

After all, markets tend to move up, down, or sideways. Bear in mind you need to make adjustments to your trading and use the right tools when economic conditions change.

A quote from Van Tharp says: ‘Expecting the same system to work in all market types is the definition of insanity.’

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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.