Bull and Bear Markets Explained for Forex Trading
The forex market is the biggest and most active market in the world. Every day, transactions worth more than $5.3 trillion are made. It is also one of the only markets that is open for 24 hours every weekday. To make money in the market, you need to either buy a currency pair or sell it. When you buy, you expect the pair to move up and when you sell, you expect the pair to go down.
A bull market refers to a situation where the price of assets is moving up while a bear market is when the price of a security is moving lower. For example, after the financial crisis of 2008, indices like the S&P 500 and Nasdaq have moved higher by more than 200%. This is referred to as a bull run. An example of a bear market is when the price of a security continues to move lower. A good example of this is the price of gold, which has fallen from a high of $1,300 in 2018 to a low of $1160.
The secret and challenge for traders is on how to identify a bull and a bear market. To do this, traders use various methods. A common method to identify when a pair is starting a bull run is to use trends, oscillators, and volumes technical indicators.
Trends indicators are used to identify when a trend is forming. They include Average Directional Index (ADX), moving averages, and Bollinger Bands. After using the trends indicators, you can use the oscillators and the volumes indicators to confirm the trend. This is because you don’t want to initiate a long or short trade in a false breakout. Oscillator indicators include the Relative Strength Index (RSI), Relative Vigor Index (RVI), and the Stochastics. These are used to show whether the pair is in the overbought or oversold territory. Finally, the volumes indicators like Accumulation Distribution and Money Flow Index are used to confirm trends and warn of reversals.
A common way for identifying the trends is to use two Exponential Moving Averages (EMA). When the shorter-term EMA – also known as the fast – crosses the longer-term EMA – also known as the slow EMA – it is an indication that a bull run is about to start. However, if you apply this method alone, you will be prone to initiating a long trade in a false breakout. Therefore, you check out the RSI and confirm it is in an oversold position and then use a volumes indicator to confirm the trend.
Another way to identify when a bull or bear market is starting is to use the economic data. For example, a currency will strengthen or weaken based on the announcements of the central bank. If the Federal Reserve suddenly becomes dovish about the economy as other central banks tighten, it means that the dollar will weaken. After the sudden announcement, the dollar is likely to move lower against the other currencies. The same is true in stocks trading. If the CEO of a company announces that the company will make more money than traders had anticipated, the stock will start a rally.
Identifying when a bull or bear market is starting is the most important thing a trader can do. To master this art, take time to learn how to trade forex and using a demo account from brokers like easyMarkets will help you a great deal.