Bullish vs bearish explained
If you are new to day trading, one thing you might immediately notice is that day traders seem to have their own language. Tune into the financial news and you might hear the anchors throw around trading terms you’ve never heard before. In this article, we are going to explain two of the most popular trading terms used by day traders and investors alike: bullish and bearish.
What does it mean to be bullish?
Being bullish means to believe prices in general are going to rise. Although this term is most popularly used with respect to the stock market, this term can be applied to any financial market including stocks, options, futures, foreign currencies, real estate, gold, you name it. It can also be used to describe someone’s stance on the market. For example, you could be bullish on a few individual stocks or the overall stock market. The take home message is: A bullish investor believes their investment will increase in value over time.
What is a bull market?
A bull market is a term used to describe a prolonged period of rising prices in the overall market. So as the stock market rises, it is said to be a bull market.
What causes a bull market?
The stock market is often perceived as an indicator of the economy. During times of economic expansion, market sentiment tends to be positive, which boosts investor confidence and leads to many investors buying stocks. As economic conditions continue to improve, bullish investors will look to weekly economic data and quarterly earnings reports to help them decide to invest more or pull back. If market conditions remain positive, investors will buy more shares of a given company’s stock in hopes that the company’s future will provide them with greater returns. The prospect for greater returns creates demand in the stock market, which leads to higher prices. This results in a bull market.
Where the term bullish came from?
The term “bullish” gets is name from how a bull fights or defends itself. When bulls attack, they thrust their horns upward.
What does it mean to be bearish?
Being bearish is the opposite to being bullish. It means to believe prices in general are going to fall. For example, a bearish investor might take a short position against the Dow Jones Industrial Average despite it reaching new all-time-highs because the investor is anticipating falling prices. Bearish traders seek to capitalize on a short term dip in the market using trading techniques such as short selling.
What is a bear market?
A bear market is a term used to describe a prolonged period of falling prices in the overall market. Although there isn’t an official text book definition of what constitutes a bear market, it is commonly said that a bear market occurs when stock prices fall by at least 20% or more from recent highs.
What causes a bear market?
Bear markets are often caused during times of economic hardship. That said, many bear markets can begin with an unexpected hit to the economy, such as the financial crisis of 2008, or the coronavirus crash of 2020. However, bear markets can also form slowly over time. For example, bearish sentiment might begin creeping into the markets if economic reports show a continued trend of high unemployment numbers, slowing job growth, or higher inflation.
As these key economic factors continue to worsen, a bullish investor can become a bearish investor and might choose to sell shares of their current holdings and move their funds into fixed income or defensive stocks. As investors sell their positions, price action will begin to fall. Traders that open short trades or that purchase a financial instrument which shorts the market, such as inverse ETFs, may also begin to appear more frequently adding momentum to dropping prices.
Where the term bearish came from?
The term bearish gets is name from how a bear fights or defends itself. When bears attack, they swat their paws downward. So as the stock market falls and maintains a downward trend, it is said to be a bear market.
How to invest in bull or bear markets?
Deciding whether to invest in a bull or bear market is a personal decision and should be done at your own risk. Generally speaking, investing during bull markets is easier than investing during bear markets. The easiest way to invest in a bull market is by using the good ole fashioned, tried and tested trading strategy, known as the “buy and hold” strategy. This strategy is so easy, anyone can do it. However, this strategy is not for short term traders.
Essentially, this is a bullish long term trading strategy in which you invest in a specific company’s shares and hold the position over many years. The goal is that over the long run, the investment will appreciate in value. Although past performance is not indicative of future results, many experienced traders, like Warren Buffet, like to use this strategy because stocks generally appreciate in value over time.
Investing in bear markets can be psychologically more challenging because as markets move lower, so will the value of your investment. Investing in stocks during bear markets is generally done in stages, using techniques, such as averaging down. Averaging down is the process of increasing your position size by gradually purchasing more shares as they fall in value. By averaging down, the overall cost basis is established at lower price rather than purchasing all the shares at once.
Trading in bullish vs bearish markets
There are many ways to trade in both bull and bear markets. One simple way is called trend trading. As the name implies, this style of trading first begins with identifying the trend. Many stock charts offer technical analysis tools, such as moving averages, to help determine the trend of the market.
Moving averages are called so because they plot the average of an asset’s closing price over a set number of days as a line on a chart. This line makes it simple to identify the trend of the market. A bullish trend is when the moving average slopes higher over time, whereas a bearish trend is when the moving average slopes lower. Trading with the trend often results in bullish traders taking long positions and bearish traders taking short positions.
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