Bulls and bears in the Forex market: basic concepts
Everyone interested in Forex trading has repeatedly met in the press, analytics, and forecasts mentioning bullish and bearish trends. Market players know that bulls and bears in the Forex market are two large groups of traders who hold diametrically opposed views. Their eternal struggle stimulates the growth of the economy while allowing the market participants to earn both on the increase in the price of assets, and on its decrease.
For those who are not yet too familiar with the terminology, we will take a closer look at who the bulls and bears are on the exchange, and how their trading strategies differ.
Who are the bulls and bears in the Forex market?
Bulls are those traders who bet on asset appreciation in the near and rarely medium term. The difference between bulls and classical investors is that the latter use long-term asset growth. Although, of course, this line is unsteady, and in reality, it is not so easy to clearly define who an exchange player is, due to the different strategies of market participants.
Bulls are great in a rising market, making the most of rising asset prices, but during a falling market, they prefer to stay on the sidelines and wait until prices fall again to an acceptable level for them, and then it will be possible to re-enter the market.
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Bears are the exact opposite of bulls. They enter a trade (short) at the peak of value, in the hope that the price will fall. And the lower it is, the more can potentially the bears earn. They push it down, opening more and more new deals. And when quotes bottom out, the bears take their rewards.
In fact, there is no clear constant division between the bears and the bulls in the market. Each player can bet on one asset for an increase and at the same time for a fall on others. Such concepts simply define the general mood of the market, when, say, the majority want to sell, but almost no one wants to buy, they mean a bearish mood, i.e. there are more bears than bulls in the market at the moment.
Bear market and its phases in Forex trading
When quotes fall by more than 20% from the maximum values, it is customary to talk about the emergence of a bear market. The main stimulus for this event is the deterioration of the economic situation, which is also accompanied by a decrease in the companies’ income and the population, rising unemployment, capital outflow, and other problems.
The coronavirus pandemic is a prime example. The introduction of bans and restrictive measures has negatively affected a huge share of enterprises around the world. Production stopped, demand for services fell, and mass layoffs followed, but even in such conditions, the bears managed to get their way.
The onset of bears is preceded by characteristic phases that can be recognized:
- The market is always growing, so optimism reigns among traders. Bulls buy up a financial instrument, it grows in price, and as a result, it becomes more and more expensive. At some point, interest in it decreases and the owners of the asset begin to sell it, receiving the difference between buying and selling. This is where growth stops.
- Then the fall begins, there are more sellers than buyers, and they begin to exert pressure. In some cases, bears are helped by economic events and market sentiment.
- A noticeable drop in quotes attracts the attention of speculators and new investments. Some want to use short positions, others predict a rebound, and others make deals with scalping. Short correction phases are possible, but the general trend remains.
- After a rapid collapse, the fall slows down. Often at this stage, an asset is oversold, its price is extremely low, and transactions become loss-making. The number of sellers decreases and bulls come on positive news, so they start buying assets. As a rule, a downtrend turns into a flat, followed by a bull market.
Bull market and its phases in Forex trading
Usually, bulls are on the offensive if the asset has grown by at least 20% from the minimum value. The bullish trend is accompanied by the strengthening of the economy, the increase in employment, the revenue of enterprises, and other positive news.
There are four main stages of a bull market:
- The first phase of the fall stopped, but the negative consequences still persist.
- Then comes the next phase, in which the asset quotes are in lateral movement, constantly losing and adding in price. Traders at this stage are thinking about the advisability of buying this instrument.
- The improvement of the economic situation in the country and the leading companies instills optimism in traders. The new flow of investment allows the bulls to give momentum, and the price of the asset rises, replacing the volatility.
- The growth rate increases, consolidating the dominance of the bullish trend. Traders with ascending positions get the difference in price, gradually launching the first stage of an already bearish trend.
Identify the time of bearish or bullish FX trends
Trading bearish and bullish trends are somewhat different, although both directions can be used to make a deal with the right approach. A lot also depends on the chosen asset: there are those that can be used in a bearish trend, and there are instruments for a bullish one.
First of all, serious fundamental reasons are needed to start a downtrend, and Fundamental market analysis will help determine them.
To find the optimal points for opening and closing deals, Technical analysis will help to analyze the charts, which should be carried out on a timeframe not lower than the daily one. To do this, you need to mark the key support and resistance levels on the chart. If an equidistant channel is observed, draw the boundaries of the channel. Next, see if there are clear reversal patterns on the high time frame charts.
Often a bearish trend is a corrective move of a larger global bullish trend. In this case, such a technical analysis tool as Fibonacci lines will help a lot. It is also worth paying attention to Elliott waves to determine what wave the trend is on now and when it will end approximately.
Bull and bear markets in Forex trading: key differences
The big difference between a bear market and a bull market is that in a bull market, assets tend to rise, while in a bear market, assets tend to decline. But there are other differences as well.
In a bull market, traders and investors are optimistic and confident that the market will continue to grow, which motivates them to buy assets more actively.
On the other hand, a bear market makes investors fear that the market will continue to fall, which can sometimes prevent them from being active, although you should not get hung up on this because you can trade efficiently in the Forex market on falling assets.
Another difference is supply and demand: in a bull market, the demand for assets exceeds the available supply, and in the second case, the opposite is true. In this scenario, asset supply outweighs demand.
How can a Forex trader make a deal in a bear market?
For active traders, a bear trend also means the opportunity to make a deal, just like a bull market. Market participants can use a variety of derivative financial instruments as well as use short positions. Let’s take a look at a few popular ways to capitalize on a downturn:
- Open short sale
Selling short, also called going short, is a trading strategy used by many market participants during times of falling prices. With this strategy, you sell an asset in anticipation of a further fall in its price in the future. When the price of an asset falls, you buy it at a lower price to cover your short position and get the price difference.
Consider a simple example: if you go short with N stocks borrowed from a broker at $50 per stock and the price drops to $30, you can buy back the stocks at $30 to cover your short position. Your total earnings will be $20 per stock.
- Hedge with a put option
A put option gives its holder the right to sell a share at a specified price, that is, the strike price, before a specified future expiration date. The money you pay for an option is called the premium.
A put option increases in value as the price of the underlying asset falls. If the price of the underlying falls below the strike price of the put option, the trader can either exercise the right to sell the asset at a higher strike price or sell the put option itself.
- Short Exchange Traded Funds (ETFs)
Short-traded funds, also known as inverse ETFs, are another bear market trading strategy that involves picking stocks that generate returns when the underlying price falls.
Using an ETF is similar to short selling, but the difference is that the return generated is inversely proportional to the market index. This inverse relationship of the ETF makes it suitable for traders who want to hedge against such a market downturn. It is also a good way to diversify across sectors. For example, an inverse ETF, say one that works inversely with the S&P 500, will rise by about 10% in value if that index falls by a corresponding 10%, making the trader money.
- Contracts for Difference (CFDs)
In addition, traders can use Contracts for Differences (CFDs), which allow market participants to sell short and increase their income. They can be used to buy or sell a variety of asset types, including stocks, ETFs, and indices. They are not related to trading the actual asset but are independent of the market as it is an agreement between the trader and the CFD broker.
How to use a bullish trend in the Forex market?
A bull market occurs when the price of an asset rises continuously over a period of time. If the market instruments rise by an average of 20% or more within two months, professionals believe that the trend indicates a bull market. At this time, the price of the asset shows a stable increase in value. The task of the bull is to have time to buy an asset that starts to rise in price at the very beginning of the cycle and sell it at the best possible price. It is advisable to close the trade as close as possible to the trend reversal point – this will allow you to get the maximum difference in price. Consider several ways to make a deal in a bull market:
- Buying growth assets with a view to resale
A trader opens positions on different assets with the expectation of winning due to the growth of the market. This means that one buys popular instruments such as commodities, stocks, and others at a low price, waits for them to rise, and then sells them at a new, higher price with the price difference.
- Hedge with call options
A call option is the right to buy securities or other assets at a specified price before a specified date. A call option buyer who pays a premium expects the price of an asset to rise, while a put option writer expects it to fall. If the price of an asset rises, the option buyer can exercise the right to buy it at a lower strike price and then sell it at a higher price in the open market. An option buyer can also sell a call option in the Forex market to close out a position.
- Exchange Traded Funds (ETFs)
Most ETFs follow certain market averages such as the DJIA or the S&P 500 and trade-like stocks. As a rule, transaction costs and operating expenses are low and they do not require a minimum investment. ETFs, try to replicate the movements of the indexes they follow, net of costs. For example, if the S&P 500 rises 30%, the index-based ETF will rise by about the same amount.
- Contracts for Difference (CFDs)
As with a bearish trend, traders can use CFDs in a bull market. Market participants with the help of CFDs buy or sell various types of assets, including stocks, ETFs, and bullish indices.
Can a bull become a bear in Forex trading?
In the Forex market, bulls and bears can seem like opposing forces, as the former seeks to raise the price, while the latter, on the contrary, drops it as low. Novice traders sometimes have a question – is it possible to change positions and trade using a different strategy?
Going from bull to bear and vice versa is, of course, possible. After all, a bull and a bear are not the pure type of traders making deals according to one of the two strategies. In fact, this is an indication that the trader is currently using a bullish or bearish strategy with a specific asset.
Thus, the same trader at different times or even at the same time, just with different assets, can behave both like a bull and like a bear. It happens that a trader expects one asset to fall and another to rise. In this case, he will be a bear in relation to the first and a bull in relation to the second. In the same way, attitudes towards the same asset can change over time. So bears and bulls on the exchange mean not so many specific traders as their behavior with a specific asset and at a specific moment.
How to manage a trend change in the Forex market?
A unidirectional price movement in a bull or bear market is called a trend, but the trend tends to change, periods of growth are replaced by periods of price decline, and vice versa.
The moment of a trend reversal for a trader is considered one of the best opportunities to make a deal and get the maximum of it. There are a few basic rules for doing this:
- You need to make sure that there is indeed a trend change and not a short-term correction.
- If a position was opened in the direction of the previous trend (for example, long in a bull market, and short in a bear market), it should be closed by locking in funds.
- Make a new deal in the direction of the formed trend. You can open a position both on the market and by placing pending orders. At the same time, additional orders need to be placed to limit losses. They should work if the reversal is determined incorrectly, and the previous trend will continue.
- In order to accurately predict the change in trends, market participants use various tools of fundamental and technical analysis, so you can determine the probable development of events. In addition, it is thanks to such tools that it is possible to predict a trend reversal in advance with a certain accuracy, for example, by finding divergences on charts or comparing published company and industry indicators with forecast ones.
Social trading in bear and bull Forex markets
Due to modern technological capabilities, Forex traders have the opportunity to use Social Trading not only to earn passively in bear and bull markets but also to share information with each other, by this, we mean that you can discuss potential trading ideas with other users of the same brokerage platform.
The main essence of social trading is a service where you can repeat deals, in fact, it is an opportunity for anyone, even a person with no trading experience at all, to make transactions with exactly the same results as an experienced professional. It is enough to connect to the trading strategy of the selected network member, and the trades of the author of the strategy will be automatically repeated on your account. Following a professional can bring tangible returns without having to spend a lot of time.
eToro is the most famous social trading network in the world with over 17 million users and a wealth of social trading tools and features. eToro is primarily a CFD and Forex broker that provides users with access to social trading software. It is also the first brokerage company in the world to launch an online social trading platform in 2006. An important advantage of eToro is that it makes this social trading platform ideal for both parties: for those who are willing to share their trading activities and receive money in return, and for those who want to copy the trades of other market participants.
Another good thing is that well-known Forex brokers such as AvaTrade have a mobile social trading app that allows you to interact with other members of the AvaTrade trading community, find mentors, ask questions and of course copy the deals of the best traders online and be completely unrestricted and not tied to a computer. The AvaSocial platform is perfect for beginners who want to connect with more professional traders. At the same time, it is also a great option for traders with a proven track record who want to earn extra income by sharing their trading activities.
VPN for safe trading in the bullish and bearish Forex market
For safe and private asset trading in bear and bull markets, it is best to use Top VPN services for Forex trading. VPNs allow you to reroute your traffic at will through one or more locations, so you will always be protected from government surveillance or any intruders. In addition, state-of-the-art military-grade encryption algorithms will prevent your personal information from leaking onto the Internet.
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A VPN also allows you to remain anonymous, which means that your online activity and data cannot be tracked, collected, or stored, as is often the case when using the Internet. This provides a sense of security and reassurance, as it also reduces the chance of becoming a victim of hackers and other forms of cyber-attacks and criminal activity that could compromise your personal information, such as your password.
Top Forex brokers to trade on bullish and bearish markets
There are many ways to make a deal in both bear and bull markets. The key to effective trading is to use additional tools such as stop-loss and take-profit for each market to the fullest. In addition, it is important to use indicators in combination with each other to determine when bull and bear markets begin or end.
Short-term sales, put options, and short or inverse ETFs, CFDs are just a few bear market instruments that allow investors to exploit a market weakness, while purchasing assets to sell them higher, ETFs and call options are suitable for bull markets.
To summarize, by following any of the trends, you can find the best assets to work with and adjust your trading strategies to take advantage of the great opportunities that open up them.
In addition, an important part of trading on the Forex market is diversification, you do not have to not only trade one asset, but it is not necessary to have one trading account with a broker. It is much wiser to follow the advice of professional traders and open several accounts with Top Forex brokers: with them, you can not only open opposite positions to increase your income and compare different trading platforms, use unlimited trading demo accounts but also get all kinds of Forex bonuses up to 100% on your deposit.
Exness Forex trading
Exness is a brokerage company that provides convenient and affordable Forex trading services to clients around the world. The list of available instruments of the company includes many popular assets such as currency pairs, stocks, indices, metals, energies, and popular Cryptocurrencies.
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As for trading accounts, clients can find standard retail, and professional ones, as well as a demo, to develop their skills before entering real trading.
Over the years in the Forex market, Exness has established itself as a reliable brokerage provider, as evidenced by licenses from regulatory bodies such as FCA, CySEC, FSCA, FSC, FSA, and others. Try trading with Exness using our dedicated button below.
Plus500 CFDs trading
Plus500 is a large online broker that has been operating in the market since 2008 and provides CFDs trading in Cryptocurrency, company stocks, currency pairs, precious metals, agricultural commodities, oil and gas, and indices.
The list of trading terminals from Plus500 includes Web Trader for Windows and macOS, as well as mobile versions of terminals for smartphones and tablets. The design and functionality of the Plus500 web version are unique: you can choose from the entire set of tools for analysis and forecasting. On the main screen of the platform, you can select instruments, and indicators, connect news and even use the economic calendar.
Accounts are classified into two types: real and demo. The latter is unlimited so you can work out new strategies, try unfamiliar tools, and test and advisers.
Plus500 supports various payment instruments including Visa and MasterCard as well as popular e-wallets such as Skrill and PayPal. In this way, you can replenish your account in just a few minutes.
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AvaTrade Forex trading
AvaTrade has been around since 2006, making it one of the oldest and most widely recognized web brokerages with multilingual support and different platforms. AvaTrade strives to provide its clients with the widest range of services and products and specializes in trading in CFDs, Cryptocurrencies, commodities, stocks, exchange-traded instruments (ETFs), bonds, and market indices.
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AvaTrade does not complicate the life of a trader and offers only two types of trading accounts: real and demo, which has on its account $100 000 to try trading 1250 instruments.
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NAGA Markets Forex trading
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XM Group Forex trading
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eToro Forex trading
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Bulls and bears in the Forex market - FAQ