Bull markets are markets that experience a prolonged and or sharp rise. In contrast, bear markets are markets that experience continuous and or severe declines. Each of these markets has its own set of opportunities and risks.
No matter what asset you are most interested in. Be it forex trading, real estate investing, stocks, etc., it is common to label markets as bull or bear. In simple terms, a Bull market is expanding while a Bear market is contracting. Because markets are often volatile from day to day (or even within a day), both terms are usually for:
- More extended periods of primarily positive or negative movement,
- Significant changes in direction, up or down (20% is a widely accepted percentage).
So what exactly is a bull market?
Bull markets are:
- The presence of several pro-buy investors.
- An excess of demand over supply.
- A high level of market confidence.
- A price increase.
Suppose you see that prices in a specific market are rising rapidly. In that case, it may indicate that most investors are becoming enthusiastic or optimistic that prices will continue to increase. And this may suggest that you are in the early stages of a bull market.
Bulls are investors who believe that prices will rise over time. Since the price of a particular cryptocurrency is influenced by public confidence in that asset, some investors try to measure investor optimism in a given market (a measure known as “market sentiment”). As investor confidence builds, a positive feedback loop occurs, which leads to more investment and higher prices.
What factors indicate the end of a bull market?
It is tempting to believe that short-term adverse movements signal the end of a bull market. Even in a bull market, volatility falls, and corrections will occur. That’s why it’s essential to look at all possible reversal signals from a broader perspective, including price movements over extended periods (shorter-term investors sometimes talk about buying the bottom).
As the past shows, bull markets do not last forever: sometimes, investor confidence begins to wane. And this can be due to various factors, including negative news, unfavorable legislation, or unpredictable events such as the COVID-19 pandemic. A sharp decline in prices can precipitate a bear market. More and more investors fear prices will continue to fall, resulting in a negative cycle as they sell to avoid further losses.
What exactly is a bear market?
Pessimistic investors who believe prices will continue to fall are called “Bears.” A bear market is when supply exceeds demand, confidence is low, and prices fall. Trading in bear markets can be challenging, especially for novice traders. It is well known that the end of a bull market and the price fall are difficult to anticipate. The recovery is usually a slow and unpredictable process that can be influenced by various external factors such as economic growth, investor psychology, and world news or events.
However, these markets can offer opportunities. Short-term investors should be on the lookout for transitory price increases or corrections. After all, buying into a bear market can be very profitable when the cycle turns if you have a long-term investment plan.
There are other tactics for more experienced investors, such as short selling, which is a way to bet on the asset falling. Dollar Cost Averaging is another approach used by many cryptocurrency investors. It involves investing a constant amount (say $70) per week or month, regardless of whether the asset rises or falls. And this diversifies your risk and allows you to invest in bull and bear markets.
By the way, where do the words “Bull” and “Bear” come from?
The origin of this expression, like many others in the field of finance, is unknown. There is a plethora of theories and evidence regarding the origin of these names. However, most people believe that the terms are derived from how each animal attacks: bulls strike upward with their horns, while bears strike downward with their claws.