Learning to understand the market and profit off it is, before anything else, a lengthy process that involves a decent share of commitment. Some of the concepts are very self-explanatory, while others can be rather tricky. However, the upside is that everything about the currency exchange market can be studied and properly implemented with the right approach. Today we will talk about several terms that you will most likely come across on a nearly daily basis as you learn more about Forex, go through news and blogs concerning the trading process and even as you converse with other traders. Understanding the basics can go a long way, because they are called basics for a reason. The foundation of each successful trader’s journey is always knowledge and in-depth comprehension of the multilayered and complex nature of currency trading. So, let’s get into this and discuss several terms and definitions that will be crucial to a productive trading experience. We will discuss the meaning of the words bull and bear applied to financial trading, as well as cover several related concepts that will assist you in the daily trades. Today we are going to talk about:
What is bull and bear in Forex
Bulls and how to trade on a bullish market
Bears and how to trade on a bearish market
Forex market analysis types
Analyzing the chart to determine current market conditions and upcoming changes
You have probably already heard at least one of these seemingly confusing terms. Traders, brokers and various market specialist use the words bull and bear on a daily basis, while describing specific conditions on the market and the ways to address them. But what is bull and bear in Forex exactly? Very simply put, they can be translated as trading slang for the words “up” and “down” and are usually used to describe the direction of a price for a specific asset or a course of a certain strategy. There are many theories in regards to where these exact terms originated from, the most popular one being is the animals were chosen based on their behavior during an attack. The bulls are attacking moving upwards as they are equipped with sharp and pointy horns, while the bears are doing the both-leg stand and then descend downwards. Fighting animals have very little to do with trading itself, however it is a great way to remember what each of the terms means. So, the major takeaway here is: bulls is up, bears is down. Now let’s look at each concept a little closer to get a better understanding on what is bullish and bearish in Forex in action.
Bulls and how to trade in a bullish market
One important thing to understand about the nature of the Forex market is that it is driven mostly but its participants. Of course, there are outside factors that end up having an effect like political events or news announcements, but even then the change on the market happens only if the majority of traders react to the same event in a similar way. This is why we can call a specific activity at the market bullish or bearish - it is because of the separate traders, whether bulls or bears, coming to a similar conclusion about the current condition and acting in the same way, evidently causing the market to go in a particular direction.
From what we learned above, specifically that bullish means upwards, we can easily establish that a bullish market is the one that proceeds to move up for a prolonged period of time and therefore leads traders into investing (buying) into the assets with the hope to sell them later at the escalated price. Bullish trading is slightly simpler to grasp since it can be translated to virtually any area of life, from goods to services. Let’s say you bought 1 lb of apples at $1 per pound and proceeded to sell them as $1 per piece. Assuming there are 4 apples in one pound, you profit will equal $3. Very straightforward, isn’t it? Currency is slightly more complex than apples, and sadly enough you cannot make a pie out of it, however in the bullish market same principle is applied: purchase a currency at its current price and re-sell it when the value reaches a new height. Now, predicting when the profitable peak is going to take place is a different task referred to as market chart analysis and we will come back to it further on.
Despite its complete transparency, there are several available ways to go about the bullish market. While they all based on the same concept, they vary on the level of aggressiveness and usually get chosen by traders with a corresponding amount of skill and expertise. In other words, the more advanced and risky trading approach is the more likely for it to be only suitable for experienced traders, who have mastered risk management techniques and have a solid account balance to operate with. Every trading strategy will in some way involve bullish actions, but here are the most common paths of measures in the bullish market:
Purchase and hold. The most basic type of bullish trading often associated with passive investing, which makes it perfect for new traders - it is easy to implement and have under control. As you might have guessed, the idea is simple - buy an asset and wait for it to rise in value, then sell to collect profit and repeat with different asset or with the same one after its price has fallen enough, for example. It is widely suggested that the newbies stick to this strategy until they gain an appropriate amount of knowledge to move on to a more fast-paced one.
Increasing purchase and hold. This strategy includes adding up to your holdings while the market is rising every time the price escalates to a certain point. For example, the trader will buy additional assets when the price value grows up 5 pips until eventually reaching the predicted reversal point, and then selling them all at the top price. Needless to say, this strategy requires very thorough analysis as well as undivided attention from the trader.
Addition during retracement. This is a strategy that is somewhat similar to the previous one, however the major difference is that additional assets are purchased not when the price reaches a new high, but on the contrary, during the episodes of retracement. In Forex, price rarely moves up in a straight plane line for an extended period of time. Since we already know that the market is driven by traders, the price will move where the majority of market participants will force it to move, and as a result each chart will contain a good share of both up and down points. So, in this strategy the trader will still focus on stocking up assets, only now they will do it only when the price drops a little, to minimize the invested amount. This strategy is risky, because only a very highly-skilled analyst will be able to tell for how long the drop will last. Additionally, the retracements are mostly noticeable on small timeframes. Timeframe is a period of time chosen to be displayed on the chart. Small time frames are crucial to fast-paced trading, however they can also have a lot of confusing “noise”, therefore it is completely natural that the task of predicting the retracement correctly should be trusted to real professionals.
Full swinging. Swinging cannot fully be described as a bullish strategy as it involves both sales and purchases within the chosen period of time. This usually looks as a series of long positions interrupted by short positions, which will very logically move along in the relation with the price. The trader will profit off two factors: the market correction caused by the fluctuation described above and from the overall uptrend. Again, it is very clear that this is an advanced strategy that has to be properly implemented, otherwise it is really simple to get confused and overwhelmed by its complexity.
Before we move forward to discussing the bearish markets and strategies, let’s take a few short moments of defining going long and going short during Forex trading. Just as the word bull is a trading slang for “up”, the word long can be translated into a more common “buy”. In currency trading you go long when you expect the value to increase overtime, as it happens during bullish markets. Likewise, going short is a term that ultimately means selling. You can think of it as shortening your assets. Going short is vital to the complete trading process as it is through those shorts that you collect you profit. Now, to the bears.
As the bulls drive the bullish market, the bears drive the bearish. There are many ways to define the bearish market exactly, but the simplest way is to picture as a complete opposite of bullish. Basically, the bearish market can be characterized by an overall downward movement, with the majority of traders selling rather than buying. We cannot really translate bearish market into apples, because apples are perishable. The currencies, however, aren’t and since the market tends to run in cycles, the bearish trends are normally followed by an uprise. With that said, it is also important to mention that bearish markets can also be used to achieve significant profit. This is because of the fact that during a downwards trend the currency value will eventually reach its extreme low, which will be the perfect time to buy it just before it starts raising in value again.
It is a known fact within the trader community that a lot of well-known highly profitable traders made a fortune off the bearish markets. Those profits happened prior to or during the major currency crashes, like that one of the United States dollar back in 1987. Although, the dollar never peaked as high as it did just before the fall, we are well aware that it proceeded to achieve visible heights afterwards. This is a nearly three decade old story which can be directly applied to the current situation at the market and used towards the advantage of the traders.
The biggest obstacle on the way to achieving visible profits in the conditions of bearish market is trader’s psychology. Every participant of the currency exchange market is subconsciously driven by the factors such as hope, greed and fear. Those very human, but yet tricky to deal with emotions can play a crucial role in the decision making process and as a result affect the overall success rate. Moving towards bearish strategies is especially difficult for the traders who got comfortable going long and have very strong feelings towards a specific asset or a position. To successfully achieve profitable trading on bearish market, the trader has to start by getting a full control over their emotions and learn to see the chart as nothing more than it actually is - a graph with numbers. This normally requires a decent amount of time spent analyzing the market and trading in all sorts of situations. Additionally, a trader has to remember that both bullish and bearish market can be equally profitable and therefore there is no reason to get all stressed when the price has taken the undesirable course. Apart from purely psychological aspects, trading is trading and all you need to achieve positive results is remain focused and follow a set of pre-established guidelines.
First of all, you will need to make sure that the current market is in fact a bear market. There is a variety of downward movements on Forex and they do not usually indicate a general condition. Some of the movements heading down include:
Retracement also known as a market pullback is a temporary drop in the price value caused by the fluctuation factor. Normally, the retarcements do not have any significant meaning to the overall picture, however in some cases the specific characteristics of several retracement can point towards and upcoming downtrend. This is where the technical indicators come in handy and assist traders with evaluating whether the given retracement is a minor hiccup or a beginning of something major.
Reversals are slightly more prolonged compared to retracements and signal for a radical change in both uptrend and downtrend. This means the reversal is a sign that the previously upward movement is going to start moving down and vice versa. There are a number of ways to indicate the upcoming reversal, most common ones are technical indicators or specific candlestick chart patterns.
The market corrections also referred to as rollbacks are declines and rises in the price value in the scenarios when a currency in question has been overbought or oversold respectively. The name correction comes from the concept that the overall changes eventually lead to the actual, or true, value of the certain currency, especially if it has been overspeculated for whatever reason.
To confirm that the market has turned bearish you can use the line tool in your Metatrader 4 and connect all the high points of the price movement graph with a straight line, then do the same to all the low points. In the bear market both highs and lows will continually decrease creating lower highs and lower lows. Bearish markets tend to be more short-lasting compared to bullish markets, but also more volatile, which means it is going to be harder to determine how long it is going to last and when exactly will it reverse. The volatility, in other words a tendency to change unpredictably and rapidly, is caused by a concept known as the market sentiment. Since, as we know, the market is driven by the traders, the way they process a certain situation is going to have an effect on the market. The way to tell for sure how the majority of traders is going to feel during the downside movement doesn’t exist. That is why it is crucial to combine sentiment analysis of the market with a more solid technical one, to have a more comprehensive view of the events. Now, as we already have a feel of how to identify and confirm that the market is bearish, let’s take a quick look at some of the options a trader has in regards to trading in such conditions.
The most common strategy applied to bearish markets is short-selling. One way to look at it is by calling it selling something you don’t possess. Meaning that in order to short-sell a currency you will first need to borrow it from someone, typically your broker, and immediately selling it at the current price. You then use the profit of this sale to buy the same amount back after the price has gone lower, return the borrowed assets to your broker and take the difference in the price value as your final profit. The key factor here is that you should only implement this strategy when you know for a fact that the market will continue moving downwards for a decent period of time. Because otherwise, if you end up facing an uptrend, there is a potential for large losses due to the escalated price of the borrowed asset.
Trading safe-haven or hard currencies. Some currencies tend to carry more stable values than others due to their economic background or overall influence on other currencies. Moreover, on Forex the assets are traded in pairs, which means that as one portion of the pair goes down in value the other one automatically rises. Historically, the hard currencies are the United States Dollar, the Euro, the British Pound and the Japanese Yen. By including one or more of those in their chosen currency pairs, traders create sort of an emergency shelter for when the certain brownish substance hits the ceiling fan for the minor currencies.
Stepping aside and avoiding trading can also be considered a bear market appropriate strategy, although, needless to say it will most probably not result in visible profits. On the other hand, however, it is capable of helping traders prevent potential setbacks. The idea behind this is that many buy-and-hold traders panic during the bear conditions and randomly decide to sell before the price goes much lower. But we know that the market cannot go down forever and the price will eventually stabilize and start going in the opposite direction, therefore prematurely dropping your holdings can be a very harmful step to make. Even Warren Buffet, the ultimate purchase-and-hold trader, believes that we can make more money while waiting patiently, rather than actively trading. But at the end of the day, the question of personal activity at the market is very personal and every trader needs to decide when to enter the trades and when to keep away for themselves.
It is time we get a little deeper into analysing the market in order to understand it better and choose the most profitable way to deal with every possible scenario. Let’s talk about the types of market analysis in general and the chart analysis in particular.
Forex market analysis
Analysing the market is the crucial part of a successful trading experience. The analysis can tell the tarder a number of things, including: what are the current market conditions, how long a certain trend going to last, what is causing the certain changes and events, what are the possible outcomes of each particular situation, what trend is most likely to follow the ongoing one and so on and so forth. Depending on the trader’s experience and the complexity of the trading strategy they chose, the factors considered in the market analysis can vary. In fact, for some trades a certain analysis type can serve as a foundation of the entire trading journey, while for others it will hardly even matter. That is why it is very important to start with things like identifying your personal trading style, choosing one or a few of preferable trading strategies and adapting appropriate risk management techniques. As all of the above have been established, the trader can move on to analysing the market and create a plan for the upcoming trades based on the results of their analysis.
There are three major categories of market analysis: the technical analysis, fundamental analysis and the least common, but yet very important sentiment analysis. Technical analysis is a purely mathematical approach of looking at the market data. Technical analysts take the current data and compare it to the data gathered from similar situations that took place at the market in the past. The majority of traders tend to base their decisions on technical analysis due two one of the main characteristics of the currency market - repetition. Yes, it is a well-known fact that the Forex market has a tendency to run in circles and patterns, and that is why it is entirely logical to assume that if a similar scenario occurred in the past it has a good chance of coming to a similar or even identical outcome again.
The fundamental analysis is way more subjective than the technical one as it is based in the analyst’s perception of various fundamental factors - economy, social and political events. Basically, this strongly relies on the fact that the same event can affect different currencies in a different way and there is no one single way to approach it. Additionally, once again, the traders define the market, which means that if the majority of participants will come to a similar conclusion about one particular event, the market will go in the direction they dictatem disregarding of how logical was the decision in question. It is also worth mentioning that the fundamental analysis is more suitable for experienced traders and financial industry professionals since it requires depp knowledge of very complex matters such as international politics. Possibly the best way to integrate fundamental analysis in your trading is to source the signals from a constantly updating fundamental report, usually provided by the broker.
Last but not least, the sentiment analysis is a way to predict the upcoming changes at the market by evaluating how the majority of traders feels about the market at the given moment. Based on the overall pessimism or optimism, the certain asset can receive different levels of attention and therefore raise or fall in value. Although it is impossible to mindread how the fellow traders feel, there are some indicators that exist to provide sentiment data. For example, the IG Client Sentiment indicator measures the sentiment direction by comparing the amount of long trades to a number of short trades at the current market.
New traders usually start with technical analysis alone and sometimes do not choose to incorporate other types as they go on. Other traders use a combination of two or all three analytical approaches to have a fuller, more insightful picture of the market. Whichever the case, avoiding using the analysis data in your trades altogether is simply not an option. Mostly because trading without a clear vision of what you are doing is gambling, and the gambling approach to Forex trading does not get you very far. To sum up, we will move on to discussing the main tool Forex traders use to monitor the bearishness and bullishness of the market - Forex trading chart analysis.
Forex chart analysis tools
A chart is the expression of pretty much everything you need to know about the market. It consists of elements designed to indicate certain price values of a given asset at different times. There are three main types of charts on Forex: line chart, bar chart and candlestick chart. While all of them are equally useful, they each serve a slightly different purpose. For example, the line chart is great for monitoring the general direction of the trend, however it is not going to be as precise in terms of exact data compared to bars and candles.
Bar chart is a foundation for candlesticks and is presented in a graph consisting of vertical lines of different colours and lengths. The vertical lines - bars, also have small horizontal marking at the top and bottom, each of those markets indicating a specific price value - at the beginning and at the end of the chosen time period. The most popular type of charts - japanese candles is very similar to the bar chart, however the key elements here are vertical boxes with vertical markings at the top and bottom. Because of the way they look, the parts of each element on this type of chart resemble the candle-related parts. The box itself is called a body of a candle and it can vary both in size and in color. Since the candle itself demonstrates the difference between the highest and the lowest value during the chosen time, the bigger the body, the larger is the difference. And vice versa - a small body would indicate that the price did not change as much. The vertical linings on the top and the bottom of a candle have several names within the trading community, the most popular terms are the wick for the top and the shadow for the bottom. The wick and shadow represent the highest and the lowest price value within the time period in question. By the length of these elements a trader can judge on the level of volatility in the current market as well as evaluate the percentage of correction.
The candles as they are already provide us with a good amount of information. For instance, if we choose the time frame in Metatrader to represent one day, each candle will indicate the necessary info for one hour within the day, so by looking at it you will be able to tell at which price the hour has started and at which ended. Now, if the entering price was lower than the exit one, it means that the candle is bullish and indicates the value going up. In the most common visualization setting the bullish candles appear in bright green. And similarly to that, the red bearish candles appear when the value has gone down and the opening price was higher than the closing one. Apart from being useful on their own, candles can also form specific combinations also known as patterns that will serve as signals for particular market conditions. By understanding the meaning of each separate candle and of the combination of them, a trader can get pretty full picture of what is currently happening and what is likely to happen next. On top of that, learning to read charts can turn out to be kind of fun because the candles and patterns tend to have peculiar names like Hanging Man or Falling Window. You can learn more about Forex chart analysis tools in our candlestick analysis guide. As for the purposes of this article, it is important to mention that identifying candle patterns can serve as a great tool for spotting the trend reversals. For example, the combination of a large bullish candle followed by a Doji Star (a candle with nearly absent body that looks like a plus sign) and then by a large bearish candle is a very strong indicator of a reversal when it is found on the top of the chart.
Bullish and bearish in Forex: conclusion
As you might have already gathered, there is nothing particularly scary about neither the bullish markets nor the bearish ones. What is more, a skillful trader will always have an action plan for every type of market condition. To guarantee yourself a successful outcome, it is important to remain in-the-know about major news regarding your chosen currency pairs and never stop learning as much as possible about the ways to read the market and forecast the upcoming events. As for the most fresh traders out there, the great way to get comfortable with navigating bullish and bearish markets as well as performing chart analysis is through the help of a free demo account. Demo was created for the purpose of polishing trading skills in the conditions of a real market in a simulated mode. This means you can practice both analysis and trading completely risk free without investing any money.