More people are turning to trading as a way to make money. In March 2021, data showed that 435,000 people made their first stock market trades in the previous 12 months. But first-time investors are also investing in other lucrative markets such as forex. It’s not hard to appreciate why when you see how much money changes hands on the global forex market each day.
It takes more than a flash of interest to make investing work for you, however. In forex, there are certain terms and phrases that you’ll want to know. Getting to grips with them can provide you with the best chances of making the right calls at the right time. Bull and Bear markets are two of those unique terms that, if understood, could make a real difference to your returns.
Bull Markets: An introduction
If forex trading is something that interests you, it’s essential to know just what you’re dealing with. So, let’s start by what it means to be a ‘Bull’ market.
Here, you can draw a link to the word “bullish”. It means that you’re assertive, confident, and optimistic about what comes next. And that’s exactly how a ‘Bull’ market plays out. It’s one in which there’s an uptick in the economy – things like more jobs being created and higher GDP.
In a ‘Bull’ market, the assumption is that economic growth will see prices increase. Just as the general mood is positive, so too is investor confidence in that market.
Bear Markets: An introduction
If a ‘Bull’ market means things are heading in the right direction, surely a ‘Bear’ market will be the opposite. In simple terms, the answer to that would be ‘yes’.
As soon as economic growth stagnates or even contracts, the impact can be seen in job losses, lower wages, or soaring inflation. For investors, the likely outcome of this is a decline in overall confidence – not to mention the value of currency pairs and other trading instruments.
With that in mind, a ‘Bear’ market is where the prevailing expectation is that prices will tumble until the economic slump is halted. ‘Bear’ markets can also last much longer than ‘Bull’ ones.
Why do you need to know this?
For first-time or novice traders, the need to know the difference is quite simple – your strategy must be based on which way the market is moving. If you invest in a ‘Bear’ market, you risk a situation where you trade at a higher price than the market perceives the true value to be. This is dangerous because you could end up making losses on your investment.
Similarly, being able to spot when a ‘Bear’ market is emerging could generate significant profits if you can buy low and sell high as the prices rise. That’s an ideal situation. Of course, it’s quite difficult to achieve that – even for experienced traders. But knowing the difference between the two markets, at the very least, can help you plan ahead and give you the flexibility to adapt.