Understanding The Bull and Bear Market
The terms bull and bear are common terms you will hear in the investing world. As common as these terms may be, sometimes defining and at the same time understanding them may not be as straightforward as it seems.
As the direction of the market will directly affect your futures portfolio, it is important to know exactly what bull and bear signify and how they can affect your trading profits.
What are Bull and Bear Markets?
Simply put, a bull market is where asset prices are on the rise. It is a reflection of investors’ confidence and increased investing as an anticipation of future price increases. During this time, it is typical for a country’s economy to be strong.
On the other hand, a bear market is where asset prices are on a decline. It is a conversion from investors being optimistic to pessimism and fear of the market. During this time, the economy is slowing down.
Origins of Bull and Bear Terms
The origins are not definite but one of the common explanations is that bull and bear markets are named after how both animals attack their victims: the bull will drive its horn up the air while the bear will swipe its paw downwards toward its victim.
Characteristics of a Bull and a Bear Market
Apart from just the direction of the prices of a bull and a bear market, there are other characteristics that a trader should take note:
a) Supply and Demand for Futures
n a bull market, we see a stronger demand for futures contracts as opposed to the supply of it. With few willing to sell contracts compared to the demand, the market drives the prices of the futures contracts up.
b) Investor Psychology
In a bull or a bear market, besides it being a result of market psychology, it will also enhance investor’s psychology and perception towards the market. A bull market will cause traders to perceive strong performance in the market while a bear market will cause traders to have a negative perception of the market.
c) Change in Economic Activities
In a bull market people are willing to spend more which result in driving the economy while a bear market is associated with a weak economy and thus leading to a decrease in consumer spending.
As a general rule of a thumb, investors view change in prices as much as 20% that the market has taken on a different direction.
However, not all markets are characterized as bull and bear. Sometimes a market remains stagnant and therefore it is known as a stagflation.
Investors and traders will always try to predict the market’s direction, whether it’s bull or bear. Successful traders utilize two ways to do this: fundamental analysis and technical analysis.
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