What Is a Bull Market?
Introduction
Market trends are one of the most important aspects of financial markets. The direction a market or asset is taking can be defined as a trend. Consequently, both technical and fundamental analysts are closely monitoring market trends.
Markets that are in the bullish trend tend to be relatively straightforward to trade, as they can be some of the easiest markets to invest in and to trade. The condition of a bull market may even make it possible for inexperienced traders to succeed. In addition to this, understanding how markets move in cycles and how they are related to each other is also crucial.
So, what is it that you should know about bull markets? What should traders do during bull markets?
What is a bull market?
It is a state of the financial market, where prices are going up, that is called a bull run (or bull market). Bull markets are often associated with the stock market. Despite this, it can be applied to virtually any financial market - including forex, bonds, commodities, real estate, and cryptocurrencies. In addition, a bull market may also refer to a particular asset, such as Bitcoin, Ethereum, or BNB. The term can even be used to describe a sector, such as utility tokens, privacy coins, or biotech stocks.
There is a term used on Wall Street by traders called "bullish" and "bearish." When a trader says they are bullish on a market, it means that they believe the price will rise. If they are bearish, they are expecting prices to decline.
Bullishness is often associated with being long that market, though it is not necessarily the case. In order to be bullish, it's not necessarily necessary that there is a long trade opportunity here and now, just that prices are rising or will rise in the near future.
Furthermore, it is worth noting that a bull market does not always mean that prices will remain stable and will not fluctuate. Due to this reason, it would be more sensible to consider bull markets when looking at a longer timeframe. In this sense, bull markets will have periods of decline or consolidation but these will not disrupt the major trend of the market. For example, look at the chart for Bitcoin below. Although there have been periods of decline and violent market crashes, since its inception it has been in an upward trend.
It is for this reason that defining a bull market in this sense depends on the time frame in which we are talking about. It is generally understood that when we talk about bull markets, we are making reference to a time frame of several months or a number of years. Similarly to the other techniques of market analysis, higher time frame trends will be more valid than lower time frame trends.
Therefore, it is likely that there will be prolonged periods of decline even in a high timeframe bull market. The movements of counter-trend prices are notorious for their volatility - although the degree of volatility can vary widely.
Bull market examples
One of the best examples of a bull market that is well-known comes from the stock market. This is the time of the year when stock prices and market indexes (such as the Nasdaq 100) are continuously climbing.
In regard to the global economy, it fluctuates between bullish and bearish trends. Depending on the economic cycle, they can last for more than a decade.
According to some, the bull market that followed the financial crisis of 2008 and went on to last until the Coronavirus pandemic was "the longest bull market in history." This may or may not be true - as we've said, high time frame bull markets can be interpreted differently depending on your perspective.
However, let us consider the long-term performance of the Dow Jones Industrial Average (DJIA). There has basically been a bull market in the stock market for the past century. The general trend is still upward, although there are periods of decline that can last for many years, such as 1929 or 2008.
According to some, Bitcoin might also follow a similar trend in the future. But it is difficult to tell whether and when Bitcoin will experience a multi-year bear market. It is important to note that most other cryptocurrencies (e.g., altcoins) will not experience similar price appreciation, so you should be extremely cautious when making investments.
Bull market vs. bear market – what’s the difference?
This is a completely opposite concept, so it isn't too difficult to guess the difference. A bull market is one where prices are continuously increasing, while a bear market is one where prices are continually decreasing. This also leads to differences in how to trade them. An investor or trader will generally want to buy and hold into a bull market. In a bear market, it is best for them either to be short or to stay in cash.
As a result, staying in cash (or stablecoins) may also require shorting the market in some cases, since we expect prices to decline over the next few months. There is a significant difference between staying in cash and shorting which has to do with preserving capital as opposed to profiting by exploiting the decline in asset prices. However, if you sell an asset expecting to buy it back lower in the future, you are essentially in a short position - even if you are not directly benefiting from the drop.
In addition to this, fees are another thing to consider. Stablecoins will likely not incur any fees due to the fact that typically there is no custody fee associated with them. Short-term positions will often require a funding fee or interest rate if the position is to stay open. As a result, quarterly futures may provide an ideal solution for long-term short positions, as there are no funding fees associated with quarterly futures.
How traders can take advantage of bull markets
Trading bull markets is relatively simple, and the idea behind it is actually quite simple. As prices are going up, generally it is a good idea to go long in the market and to buy dips. It is for this reason that a buy and hold strategy as well as dollar-cost averaging are generally suitable for long-term bull markets.
In trading, there is a saying that goes, "The trend is your friend, until it isn't." This is simply saying that it makes sense to trade with the direction of the market trend. At the same time, a trend does not last forever, and a strategy which has been successful in one part of the market cycle, might not be successful in another. However, one thing is sure: markets can and will change. The recent COVID-19 outbreak has shown us that a bull market that has been in place for many years can disappear in just a matter of weeks.
It is only natural that most investors will be bullish during a bull market. This makes sense considering the fact that prices are going up, so the overall sentiment should also be bullish at the moment. In spite of this, there will be some investors who tend to be bearish even during a bull market. If their trading strategy accommodates for it, they might even be able to succeed with short-term bearish trades, such as shorting.
Thus, in a bull market, some traders will try to short the recent highs in order to make a profit. Nonetheless, these strategies are considered advanced by most traders and therefore suited for professional trader. If you are a less experienced trader, you may find it more sensible to trade according to the trend in your industry. A lot of investors make the mistake of trying to short bull markets. In the end, stepping in front of a raging bull or a locomotive can be extremely dangerous.