In financial markets, players are divided into two groups: bulls and bears. Initially, these were the names of traders in stock markets; later, after Forex appeared, the names were attributed to traders in financial markets as well.
First reference
Some say that bulls in bears were mentioned for the first time in 1714, in Charles Johnson’s book “The Country Lasses”. However, the story there had no connection to stock trades, thus, it is not excluded that people used to call themselves these names before the appearance of the book, and then the names were adopted by authors.
Who do we call bulls and bears?
The term “bull” refers to a trader or an investor who plays long and waits for the financial instrument to grow.
Bears are quite the contrary. Bears are traders or investors who play short, i.e. wait for the price of the instrument to fall.
Connection to the movements of financial instruments
Bulls are associated with the growth of the financial instrument because it lifts the enemy on its horns when it attacks. A fighting bear uses its paws and claws, hammering the enemy top-down, which is associated with falling of the financial instrument.
A bull’s statue on Wall Street
The most famous statue of a bull is in New York near Wall Street. In 1987, when the stock market crashed, a group of enthusiasts erected a bull’s figure there to augment enthusiasm about the future of the US economy and stimulate traders to buy stocks.
Looking at the S&P 500 chart, we may conclude that the bull succeeded: the index stopped falling and started growing gradually. Since then, it has been the market favorite.
It looks like a silly joke; still, the statue has become famous worldwide.
How does a bullish stock market form?
If there are mostly bulls in the market, playing long, they form a certain trend called bullish.
A bullish trend means gradual or active growth of the financial instrument.
In the stock market, bullish trends can last for years, when the stocks of several or even all the sectors of the economy grow in price. In such a case, the market is characterized as bullish.
How does a bearish stock market form?
As for bears, they play short and wait for the financial instrument to fall. Normally, the price of an asset falls unexpectedly due to some negative news or a crisis and lasts not for long, because investors try to get rid of the falling asset and take the profit. Meanwhile, bears worsen the situation and speed up the falling of the price.
In times of financial crises, almost all assets fall in price, so in such a case, the market can be called bearish; to make a profit in such a market, you should open a selling position.
How does a bullish market form in Forex?
In Forex, we also call the market either bullish or bearish, only here, we do not estimate the behavior of assets in each sector (because there are no sectors in the capital market) but the currency movements against safe-haven assets, which are the US dollar, the Japanese yen, and the Swiss franc. However, the main part is played by the USD as it is used as the main currency to avoid risks.
When the economy recovers from the crisis and starts recovering, the USD usually starts falling in pairs with other currencies, which makes the market turn bullish.
How does a bearish market form in Forex?
In the situation when investors avoid risks and buy the USD, it gains power in pairs with other currencies. This forms a bearish market.
The situation somewhat complicates visually when the dollar is the first currency in the pair, for example, in EUR/USD. The falling of the dollar leads to the growth of the euro, and the quotations of the pair aim upwards. In the case of USD/CHF, the decline of the dollar will take the quotations of the whole pair down. Hence, you need to track each pair individually, identifying a bullish or bearish trend.
What to do in a bullish trend?
The safest way of trading is trading the trend. And trading in a bullish trend is especially safe.
Bullish trends are normally much longer than bearish ones, which let a lot of investors participate in the movement. The asset grows gradually, attracting the attention of bulls; meanwhile, a lack of news will not somehow compromise the asset price, and positive news will drive even more attention towards the instrument, pushing the price further up.
So, a trader only needs to buy the asset and hold it for as long as possible.
What to do in a bearish trend?
A bearish market is more aggressive. It plays on negative news more frequently; sometimes it summons to panic and drives the price down uncontrollably, up to stopping trades in the exchange. Bears always need to stay cautious, ready to close their positions at any moment.
However, this is more about the stock exchange; as for the currency market, here a bearish trend may last for as long as a bullish may do. For example, in USD/CHF, a bearish trend kept developing for 12 years, in 2001–2013.
Hence, in a bearish trend, it is safer to take short positions. This will be much more profitable than fighting with bears.
How to make a profit in a bullish trend?
The schemes of work in a bullish or bearish market are quite similar to each other, that is why traders have little trouble switching between them. And to make a profit trading the trend, you only need to know one rule.
In a bullish trend, open positions aiming at the breakaway of the nearest resistance level.
A bullish trend may last long, which means after a correction and another breakaway of the resistance level, you need to place another buying order. This way, you can increase your positions until the trend is over.
How to make a profit in a bearish trend?
The scheme in a bearish trend is similar, only instead of the resistance level use the support one. In a bearish trend, open positions aiming at the breakaway of the nearest support level.
You can increase volumes by placing new orders that will be triggered by breakaways of newly emerging support levels.
Hold your positions until the trend is over.
This is the simplest and most affordable method of trading the trend. Of course, there are plenty of ways to detect the trend and find the entry point — here, everything depends on the trader’s knowledge and skills. Normally, the simplest methods of analysis turn out to be the most efficient.
Closing thoughts
Trading in financial markets, you do not need to define yourself as a bull or bear; the market requires nothing from investors. However, a trader needs two important skills: the skill to adapt to the current situation and to admit their mistakes to close losing positions.
However, many note an interesting pattern: when they open a buying position, the number of profitable trades grows; with selling positions, it falls. That is why some traders start calling themselves bulls.
For some people, it is psychologically easier to open buying positions as things are quite simple here: you buy cheap and sell expensive. As a result, there are always more bulls in the market. If this pattern is strong in you, bring your skills of trading in a bullish market to perfection, affiliating with bulls, and avoid playing short.
On the other hand, bears prefer to trade aggressively, they need adrenaline, fast profits, they try to make money on trouble. But statistics say that only one of ten ideas really works. From this point of view, an outsider is easier to find than a winner. This is like a stake on a horse that loses. Such traders call themselves bears and enjoy playing short.
If you are not sure about yourself, check your account history. If you still doubt, you might be a universal trader that can work equally as a bull or bear.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex
