Forex Trading: What are Bullish and Bearish Trends?
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As a novice trader, you often hear or read terms that seem outlandish. You will probably run a quick search online to see what it is all about. In this article, we explore the Bullish and Bearish terms and go beyond their definition.
Finance gurus refer to bullish or bearish markets according to the upward or downward price trends. A bullish market is one that is experiencing recovery. Whereas a bear market is one that is experiencing a substantial price decline. Therefore, the term bullishness refers to traders assuming securities will move up in price. Consequently, bearishness is a trader sentiment that securities are moving down.
So, what do these two major and opposing trends mean for traders?
Identifying a Trend
Both bullish and bearish markets can be identified in a price chart. A bull market will have higher highs and higher lows that consistently grow. Short periods of price correction movements are normal in both markets. They are counter-trend movements that are often a reaction to news or profit-taking activities. That’s why trend traders often look for a price correction to enter in the direction of an underlying trend. This tactic means the risk-reward ratio is more attractive.
What Trend Traders Do
If you want to be a trend trader, the first and most important thing you need to do is determine what direction you will trade in. And you need to decide in advance. Your next point of order is to enter trades only based on signals that match your trend direction. It requires some discipline and practice. Keep in mind that having a couple of losing trades before reaching a winning one is common for trend trading. Your maximum profit is due to the consistency of a trend. Therefore, every win can cover previous losses.
Counter Trend Trading
Should you decide to trade in a counter-trend, there are basic rules to consider:
- Don’t expect long term price movements, because the very concept of a counter-trend implies you are riding the short opportunity wave of a price correction.
- The main idea to enter a trade in the opposite direction betting on a pullback, but following the global trend direction. That way you increase your profit margin when the price correction movement is over.
The Bullish Trend
A bull, or upward market trend is one that has prices continuously climbing higher for long periods of time. Some bearish markets may experience a few days of an uptrend, but this is not enough to signal a move into a bull market.
The Bearish Trend Explained
A bearish, or downward, trend in a market appears when prices are continually falling. And once this happens, markets can remain bearish for years. But to avoid confusion, a few days of lowering prices is not enough to signal a market is moving into bear mode.
Main Differences Between a Bear and a Bull
There are major differences between the bear and bull markets, here they are:
- Short-selling – a profitable trade in a bear market means you need to short-sell amid falling prices.
- Risk of loss – while buying into a bull market has a limited potential for loss, short-selling a bear market means there is a high possibility for big losses if the prices keep moving against you.
- Speed – a bull market has a gradual build-up, however, a bear market occurs suddenly and drastically.
It’s a Wrap
At the end of the day, it is your trading style and strategies that determine if you are a trend trader. Identifying current market conditions is not an easy task. It takes a certain level of skill to identify a trend direction, and not every trader feels confident enough to jump on that train. However, when a trend is clear in the stock market, many traders, including beginners, can trade efficiently with the right technique. Therefore, the key is to remain consistent with a timeframe you are comfortable with and thoroughly apply risk management rules. This will limit potential losses if the price goes against you. And this advice applies whether you trend trade a bull or bear market.
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