In trading language, bullish and bearish terms describe market trends that drive prices in financial markets. Generally speaking, markets can move in three directions: up, down, or sideways. And you’ve probably heard that the market is either bearish or bullish based on price movements. Both are used to describe rising or falling markets. But what does this mean?
The terminology is based on how the bulls and the bears attack their prey. Bears stomp their paws on the prey pushing it downwards, while bulls thrust their prey upward.
What is Bullish Market?
In a bullish market, prices are rising or are expected to rise. Traders’ positive expectations, optimism, and confidence in ongoing uptrends are the characteristics of bullish markets. Price movements in a bullish market tend to last for a while, maybe weeks, months, and even years. In forex trading, a bullish market usually reflects high employment levels and GDP figures, as the economy of the country is strong. High sentiment levels in a currency are also another factor in forming a bullish market trend.
What is Bearish Market?
A bearish market on the contrary represents negative sentiment, unexpected events, and usually weak economic conditions. A Bearish market features falling prices where traders believe that prices will continue falling. Traders start selling influenced by weak data, sudden policy decisions, or losing confidence in the currency or its economy.
Bullish vs Bearish Market Explained
Traders refer to the markets as being bullish or bearish based on the direction of price movements. They are often used to depict whether a market is optimistic or pessimistic. One big difference between bullish and bearish markets is confidence levels; prices tend to go up when confidence is high, and down when confidence is low. Both trends are usually affected by fundamental and technical factors.
When the market enters a bullish phase, investors become more excited to invest the money as confidence is usually high and risk appetite goes up. On the other hand, bearish markets push investors to sell riskier assets like stocks and less-liquid currencies such as those from emerging markets.
In bearish markets, traders take short/sell positions. While in a bullish market, traders are looking to take long/buy positions.
How Bullish and Bearish Markets affect your Trading
Unlike other financial markets, forex trading is unique in offering its traders the opportunity to profit from both bullish and bearish markets. This is because forex trading is based on the idea of currency exchange, when one currency is weakening the other is strengthening thereby allowing you to take advantage of rising and falling markets. You can long/buy a currency pair if you expect the base currency to rise, or you can short/sell the pair when you expect the base currency to fall. And gain profits from both trades.
It is important to pay attention to bullish and bearish market trends before making your trading decisions. By being aware of market trends, you can make better decisions supported by risk management basics while understanding when to enter and exit your trades.
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