Trader Insights

Bullish vs Bearish markets: What’s the Difference?

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The terms Bulls and Bears first originated from the Stock Exchange and they’re now commonly used throughout most financial markets.

Although if you’ve never stumbled across them before, hearing the phrase “bullish vs bearish forex markets” might give you a moment of pause! 

For any trader however, knowing the differences between bullish and bearish markets can help immensely when it comes to executing successful trades.

We’ve defined them below and given some additional tips as to how to identify which a market is, plus recommended how traders should behave when faced with either a bullish or bearish market.


Related Reading: Read more about the different types of traders.

What is the definition of Bullish?

If a trader is a bullish investor or trader, it means that they are optimistic about the economy and financial markets, and believe that prices will rise and stay on an upward trend.

Bullish traders may be optimistic about one specific security, or they might believe that an entire market is due to rise. For example, a trader may only be bullish about AAPL (Apple) stock, or they may be bullish when it comes to trading in a particular market, such as the futures market.

Bullish traders may use trading strategies like pullbacks, where they will buy on prices that are moving down in the short term because they expect the price to fluctuate and begin to rise again within a short turnaround time.

So overall if you’re optimistic about particular securities or markets, you’re likely to be adopting a bullish attitude.

What is the definition of Bearish?

If a trader is a bearish investor or trader, it means that they are pessimistic about the economy and financial markets, and believe that prices of securities will fall and stay on a downward trend.

So, in that essence, someone who is bearish with their trades or investments is the exact opposite of bullish.

Just like bullish investors, bearish investors can be either pessimistic when it comes to trading particular markets, or they can be pessimistic about particular stocks. 

Bearish traders can even use the same trading strategies as bullish traders. For example, if we take the earlier pullbacks strategy, a trader who was bearish would sell the stock when prices rose, as they would anticipate prices to begin falling shortly afterward.

If you’re feeling particularly negative about a certain stock or market, you’re likely to be adopting a bearish attitude. 

What is the difference between a bullish and bearish market?

Now that we’ve defined the differences between bullish and bearish traders, it’s much easier to understand the differences between bullish and bearish markets.

A bullish, or bull, market is a financial market where the prices are moving up consistently. In a bullish market, not all stocks necessarily need to be increasing to declare it as such, as it’s more determined on the trend of the market’s main equity indices. For example during a bull market the Dow Jones Industrial Average and the NASDAQ 100 might be climbing, even if some other equities aren’t. You can find out more about equity indices here.

Bull markets are the preferred type of financial market because mostly every trader who has an investment in the market will benefit from it.

On the other hand, a bearish market is the opposite of a bullish market. 

In a bearish, or bear, market, the prices will be consistently trending down. To declare it a bearish market however, the prices of securities in one of the key indices, such as the Dow Jones Industrial Average, need to have been falling for a select period of time by at least 20%.

Bear markets are loathed by traders because investors tend to feel incredibly pessimistic about the future outlook of the market, and those who have invested tend to lose money and open themselves up to more risk. 

However, traders who short the market (that is, predict the market will downturn and place make shrewd trades with this in mind) prefer bearish markets as they stand to profit from the downturns. 

Other Bullish and Bearish Market Characteristics

Though it’s mostly easy to tell a bullish or bearish market by the direction of their stock prices, traders can also use other accompanying characteristics to identify whether or not a market is moving in a bullish or bearish direction. 

Three characteristics to look out for include:

The Supply and Demand for Securities

In bullish markets there will be a strong demand and weak supply for securities. That means that whilst a lot of traders want to purchase securities, few will be willing to sell them. The knock on effect of that results in rising share prices because investors will compete to obtain what equity is available. 

In bearish markets, the opposite occurs. More traders will be looking to sell than buy, which results in lower demand than supply and declining share prices.

Investor Psychology

Market behaviour is heavily influenced by how individuals perceive and react to its behaviour, which means that trading psychology can also influence whether a market is bullish or bearish.

In bullish markets, investors will be more willing to participate because evidently rising stocks promote a positive atmosphere and there is more chance to obtain a profit.

Trading psychology is so important. Read why.

However during bearish markets, negative market sentiment occurs as investors move their money from equities into other securities. This decline unsettles confidence in the market, and prevents traders from injecting their money back into the market which only adds to the price decline and provides little to no opportunity to resettle it.

Changes in Economic Activity

Another identifier that can determine whether a market adopts a bullish or bearish attitude is to monitor changes in economic activity.

The economy has a substantial impact on the stock market, and global news events can change the sentiment of a market entirely.

As they are negative, bearish markets are predominantly associated with weak economies because businesses are unable to make large profits due to lack of custom. Such a decline in profits affects how the market values company stocks.

In bullish markets, the opposite occurs. Because people have more money to spend and are happy to spend it, they strengthen the economy and raise company stocks.

What traders should do in each market

In bull markets, traders would be wise to take advantage of rising prices and buy stocks early where possible and then sell them once they have reached their peak. 

In bearish markets however, there is a significant chance of incurring risk and loss because stocks are losing value. Because of this, it’s advisable to either short the market, or choose stable investments such as defensive stocks. 

Defensive stocks are those whose performance is minimally impacted by changing trends in the market. Examples include government owned industries like utilities. 

Meanwhile taking short positions in bearish markets will allow traders to profit from falling prices. Ways to achieve shorting the market include short selling, or purchasing put option contracts.

In summary:

Optimists and pessimists can flourish provided they find their favoured markets, and make investments which are both profitable and successful.

Talking of success, at Alphachain we’ve got a track record of it. If you want a slice of your own, why not check out one of our funded trader programmes where you could earn your own $20,000 trading account.

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