Why You Should Know About Bearish and Bullish Markets
Following the stock market crash of 1987, artist Arturo Di Modica forged a sculpture representing the “can-do” spirit, determination and courage of New Yorkers, seeing it as an antidote to the recent market turmoil.
Today, the “Charging Bull” stands proudly in Bowling Green Park near Wall Street, welcoming millions of visitors each year, and has become symbolic of market gains.
Bear markets, on the other hand, are named for the way a bear attacks — with a strong downward swipe of its paw. This has come to represent sustained market drops.
While most investors hope for bullish markets and dread bearish ones, forex traders who understand both of these trends and their impact on foreign currencies can find success on both the way up and the way down
Currencies Need Pairs
It is important to remember that a currency can’t be traded by itself. It needs a paired currency to take a position. Forex traders are always taking a position that one currency will rise or fall relative to another. This reliance on independent market dynamics is what makes currency trading different from traditional stock market investing.
A bull market is one in which things are trending up and investors have confidence in gains. This usually leads to an increase in investment as market players are willing to take a bit more risk. While it generally refers to stock market trends, currency markets respond as well. Not all currencies will respond the same way to market trends.
If markets start weakening and trending down, it is said they are “‘bearish.” One commonly accepted metric indicating an official bear market is a 20 percent fall from a recent high. One benefit of currency trading is that traders can capitalise on markets moving in either direction.
A savvy trader who recognizes bearish trends may capitalize by “selling” a currency at current prices, with the intent of “buying” it back when markets drop. While this mindset of betting on losses can sometimes be difficult for those new to forex trading to understand, it provides greater opportunity for success in the long run.
As noted above, not all currencies move in the same way when a market shifts. Usually, in bullish markets — when traders are feeling confident and have a greater appetite for risk — money will flow to currencies with more risk and volatility in an attempt to capitalise. When markets get bearish, investment typically flows back into safer, more stable currencies.
The most commonly accepted safe-haven currencies are the U.S. dollar and the Swiss Franc. The U.S. dollar claims this status because of its position as a primary reserve for most central banks around the globe. The Swiss Franc gets its title from a historically low rate of inflation and its backing by gold reserves.
So what’s the conclusion?
Both bearish and bullish markets are inevitable. Fortunately, traders in forex markets can capitalise on market movement in any direction if they understand the underlying dynamics and can recognise trends early.
Taking time to learn these principles and getting comfortable taking positions in any market will help you find success trading currencies.
To learn more and to start trading with a no-nonsense broker, visit TIOmarkets.
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