The Difference and Demarcation Lines Between Bearish and Bullish Markets.
The concepts of bearish and bullish markets are common categories to denote markets with declining and rising trends, respectively. Usually, the transition of the market from one of these phases to another is observed if the changes in trends reach about twenty percent. Thus, the fall of indexes to this level means entering the bearish market; the opposite situation is the bullish phase identifier.
This approach is associated with some logical problems. For example, if, within a bearish market, prices fall sharply to a significant level (for example, from $ 100 to $ 20), it will be enough for them to then increase by only $ 4 (20% of $ 20) for the market to be considered bullish. This statement will be technically correct; however, it will not be of significant benefit to investors and traders in their attempts to predict further trends. Therefore, it is advisable to consider other major factors that distinguish the two types of markets and draw a demarcation line between them.
Two types of markets: general definitions.
The distinction between the two markets can be made based on the most straightforward principle: the bearish phase occurs in case of falling prices; entering a bullish phase denotes their growth. However, if, in reality, everything was so simple, this question would not cause many nuances and discussions.
For example, looking at time frames of different scales, one may notice very different market trends within five years and one month. Trends shown within five years do not take into account fluctuations that occur at the level of several hours or days. If the market has been growing for the last two years within a five-year period, the investor considering it on this scale will conclude that there is a bullish phase. In turn, one who looks at monthly figures will take into account smaller-scale fluctuations, such as falling prices over the last week, and note a bearish phase. The most confusing aspect of this situation is that both the first and the second points of view will be formally correct and even helpful for investors, depending on what goals they pursue. Therefore, in this regard, it can be concluded that the attribution of the market to the bearish or bullish phase is a relative concept that depends on the perspective from which it is evaluated.
The peculiarities of bearish markets.
The difference between the two types of markets is not only in the availability of upward or downward trends. Structurally, both phenomena are also different. For example, while the bull market simply denotes a prolonged growth in assets’ value, the bear market goes through several clearly distinguishable phases. These are as follows:
- Stage one. The prices are high, as well as the investors’ general attitude. As a result, by this phase’s end, investors get their profits and drop out.
- Stage two. Due to investors dropping out, stock prices start to decline rapidly. As a result, trading activity is declining, profits are falling, and economic indicators are gradually approaching mediocre values compared to those they had in the previous stage.
- Stage three. Taking advantage of the vulnerability of the market, speculators create artificial fluctuations, as a result of which some prices rise again.
- Stage four. The prices keep on declining, albeit now this process is slow and gradual. As soon as the market recovers from decline and the investors return, the downward tendencies slow down, and the movement towards the bullish phase resumes.
Factors to consider when detecting bearish and bullish tendencies.
Although forecasting and identifying the direction in which markets are evolving is not an exact science, as it depends on many factors and elements of perspective, several aspects need to be considered when dealing with this issue. Here are some of them:
As mentioned above, the definition of markets as rising or falling depends on the time frame in which the observation takes place. If you are a day trader, you should look at bullish or bearish trends within the shortest time intervals, such as a few hours. Investors should pay attention to long-term trends that last for years. To date, the record for the duration of the bull market belonged to the period between 2009 and 2020, which went into a bearish phase due to the current pandemic. So before you identify a market as a bearish or a bullish one, decide precisely whether you want to profit from it from a long- or short-term standpoint.
Comparing the pieces of existing data, one can conclude that there is a stable relationship between market trends and economic processes at the national and global levels. This relationship can be easily explained by the fact that market fluctuations depend on public sentiments, which, in turn, arise as a reaction to economic forecasts and expectations. Therefore, the economic forecasts can be helpful in understanding the alternation of market phases.
Any processes in the markets do not happen by themselves. They are the consequences of the behavior and decisions of individuals who carry out market operations. Investor psychology directly affects market fluctuations between bearish and bullish phases. Positive sentiments and high expectations of investors about the markets create bullish trends; Negative expectations lead to bearish phases as investors rush to withdraw their profits due to uncertainty about future scenarios.
If you want to deal with investment, the ability to anticipate market trends is crucial to your success. Of course, you can go the easy way and get acquainted with the analysis and forecasts. Numerous specialized platforms, such as NSBroker, offer accurate and comprehensive analytical reports with which even beginners can easily understand market tendencies. However, successful traders stand out from others because they rely not only on outside analytics but also on their own conclusions.
In this regard, the ability to identify bearish and bullish trends in the market is one of the critical skills required of an investor. Meanwhile, it is a challenging task for which there is no one universal method. Currently, the technique that can be considered closest to universality is that put forward by Charles Doe, who proposed identifying markets in which heights and lows are the highest as bullish, and vice versa. However, even with this rule in mind, investors must approach the identification of market phases individually in each situation, taking into account its features and their own interests.