What are bulls and bears in trading?
The terms bulls and bears are commonly used to describe stock market and forex market conditions.
These words describe the overall sentiment of traders, which ultimately determines the direction of price action.
Understanding these concepts is essential for making great trading decisions.
In this article we explain exactly what are bulls and bears in trading, how to identify bull and bear markets, and why understanding these concepts is crucial for all traders.
What is a bull market?
A bull market is characterised by rising prices, buoyed by a general sense of optimism.
The upward trend is typically driven by factors such as strong economic data, positive geopolitical developments, or increased investor confidence.
Strong economic data may include statistics such as low unemployment rates, positive GDP growth, or lower-then-expected inflation data.
Definition of a bull market
Although there is not an agreed technical definition of a bull market, this is how you can recognise bull market conditions:
- Rising prices: In a bull market, you’ll see sustained upward movement in the price of a stock or currency pair
- Increased risk appetite: Traders in a bull market are more willing to take risks, leading to higher demand for riskier stocks or currencies. This is known as a ‘risk-on’ scenario
- A move away from safe-haven assets: During a bull market, investors tend to move away from safe-haven assets like government bonds and currencies (such as the Japanese Yen or Swiss Franc.) Instead, traders tend to move to other currencies and assets that are expected to perform well in a ‘risk-on’ environment, such as AUD and NZD
How to identify a bull market
- Look for a series of higher highs and higher lows
- Use indicators such as the Parabolic SAR indicator, Bollinger Bands or the Supertrend indicator to show that price action is moving in an uptrend
- Look out for positive economic news or financial reports that could boost market sentiment
- Observe the overall market mood; widespread optimism and confidence can signal a bull market
However, don’t assume that positive news will automatically move the market up.
Highly-anticipated positive news may have leaked out prior to the official announcement, or the positive news could already be ‘factored in’ to the price.
Best pairs to trade in a bull market (risk-on)
High-yielding currencies like the AUD, NZD, and those from emerging markets tend to perform better during risk-on periods.
These currencies typically have higher interest rates and may present more attractive growth prospects.
In a bullish risk-on environment, traders often trade these currencies against lower-yielding ones (a strategy known as the carry trade) to benefit from both interest earnings and the potential appreciation of the rising currency.
Best bull market currency pairs
- AUD
- NZD
- Emerging market currencies such as Brazilian Real (BRL), Indian Rupee (INR), South African Rand (ZAR), Mexican Peso (MXN), Hong Kong Dollar (HKD)
What is a bear market?
A bear market is the opposite of a bull market, characterised by falling prices and widespread pessimism.
Bear markets can be triggered by negative economic data, geopolitical tensions, natural disasters or pandemics, or other events which cause a loss of investor confidence.
Bear market definition
- Declining currency prices: In a bear market, the price of a stock or currency pair will generally show a downward trend
- Negative economic indicators: Bear markets are often preceded by poor economic data, such as rising unemployment, declining GDP, or higher-than-expected high inflation
- Flight to safety: In a bear market, traders often move their capital into safer assets, leading to increased demand for safe-haven currencies in what’s known as a ‘risk-off’ environment
How to identify a bear market
- Look for a series of lower highs and lower lows
- Observe the bearish signals given by the indicators you are using, such as Bollinger Bands or the Supertrend indicator
- Pay attention to economic news that may indicate a downturn, such as recession warnings or political instability
- Observe market sentiment; widespread fear and caution among traders can be indicative of a bear market
Best pairs to trade in a bear market (risk-off)
JPY often performs best during periods of uncertainty.
This is partly because JPY is the currency of choice for carry trades, because of the extremely low interest rates in Japan. This is called being a ‘funding currency.’
The safe haven CHF also tends to perform well during risk-off. It is also sold as a funding currency for carry trades, and benefits from traders exiting their leveraged positions.
The USD also performs well during risk-off because it is the global reserve currency.
It’s a safe place to be during risky times, and there is often a dollar shortage due to the additional demand, which can push the USD higher.
EUR is a highly liquid currency and can also outperform during these periods, although we have seen it trade both ways depending on the trigger.
Best currency pairs to trade in a bear market:
- JPY
- CHF
- USD
How to use indicators to show bear or bull market trends
There are many indicators available that can be used to determine price direction.
These include moving average lines, the Relative Strength Index (RSI), and the MACD indicator.
Here you can read more about the best indicators to use for forex trading.
However, here at MarketMates our three preferred indicators to show whether price action is bullish or bearish are:
- Parabolic SAR
- Bollinger Bands
- Supertrend indicator
1. Parabolic SAR
The Parabolic SAR (Stop and Reverse) indicator is a trend-following indicator that appears as a series of dots placed either above or below the price candles on a trading chart.
- Bull market: When the dots are below the price, it indicates an uptrend or bull market
- Bear market: When the dots are above the price, it signals a downtrend or bear market
How to use the Parabolic SAR indicator
The Parabolic SAR is most effective in trending markets. A flip from below the price action to above it (or vice versa) can indicate a potential reversal in market direction
The chart below shows how the Parabolic SAR indicator, with its blue dots either above or below price action, clearly shows whether the market direction is bullish or bearish.
2. Bollinger Bands
Bollinger Bands consist of a moving average (usually 20 periods) and two standard deviation lines plotted above and below it.
They help you identify trend direction, periods of high or low volatility, and potential market reversals.
- Bull market: In a bull market, prices tend to stay above the centre moving average line, and often move near or above the upper Bollinger Band. Consistent touching or closing above the upper band can indicate strong bullish momentum
- Bear market: In a bear market, prices tend to hover near or below the centre moving average line, often going lower below the bottom Bollinger Band. Consistent touching or closing below the lower band can signal bearish momentum
How to use Bollinger Bands
Look for price movement relative to the bands. If the price breaks out of the bands and then returns within them, it may indicate a reversal.
A sustained move towards the upper band suggests a bull market, while a move towards the lower band suggests a bear market.
3. Supertrend Indicator
The Supertrend Indicator is a trend-following tool that helps you identify the prevailing market direction. It appears as a line that changes colour based on the trend direction
- Bull market: When the Supertrend line is below the price and is typically coloured green, it indicates an uptrend or bull market
- Bear market: When the Supertrend line is above the price and is typically coloured red, it signals a downtrend or bear market
How to use the Supertrend indicator
The Supertrend Indicator is useful for identifying the overall trend direction.
A colour change from green to red (or vice versa) can indicate a potential shift from a bull to a bear market.
Why understanding bulls and bears is crucial
Understanding whether the market is bullish or bearish is vital for implementing a successful trading strategy.
Market type (ie. quiet or volatile, sideways or trending) is also very relevant to choosing a successful trading strategy.
By recognising the signs of bull and bear markets, you can:
- Adjust your trading strategy: Use different trading techniques depending on whether the market is trending upwards or downwards, or is quiet or volatile
- Manage your risk more effectively: Make informed decisions about trade direction, and when to enter or exit trades to minimise losses if a price direction change is imminent
- Stay ahead of market moves: Anticipate potential shifts in the market by keeping an eye on candlesticks, your preferred chart indicators, economic news and global events that could affect your trading decisions
Final thoughts
Knowing the difference between a bull or a bear market will give your trading a significant edge. You can find out more about how the forex market works here.
By understanding what drives these market trends, and how to identify them, you can adapt your trading strategies to the current market pattern.
Whether you’re new to trading, or looking to refine your skills, keeping an eye on market sentiment and understanding what drives bears and bulls will be invaluable.
If you are day-trading, remember not to get too carried away with the immediate price direction on a short-term chart timeframe, such as a minute or five-minute chart.
Always keep your eye on the longer-term bull or bear direction of the market using a higher timeframe, such as daily and weekly charts.
Till next time, happy trading.
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Sources
Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
- Bollinger Bands – John Bollinger https://www.bollingerbands.com/
- Louise Bedford – The Secret of Candlestick Charting https://www.tradinggame.com.au/product/technical-analysis/the-secret-of-candlestick-charting
- J. Welles Wilder Jr – inventor of the ATR indicator in his book New Concepts in Technical Trading Systems https://www.amazon.com.au/New-Concepts-Technical-Trading-Systems/
