Understanding the main differences between bullish and bearish markets plays a vital role in our investment portfolio. By knowing each of the market’s main characteristics, we can also create a proper risk management strategy.
Bullish or bearish trends change market conditions and have a strong influence on traders’ emotions. In recent years, cryptocurrency has been swinging between bear and bull markets, while traders change and adapt their strategies according to the macro trend.
But that’s not all.
This guide will go through the main differences between bullish vs. bearish markets. The goal is to understand the anatomy of each of these trends and which patterns we can follow to improve our exposure to risk and digital assets.
How Are the Bull and Bear Derived?
Both bulls and bears are strong animals that are usually linked to aggressiveness and strength, respectively. The terminology is related to how these two animals attack their opponents. For example, a bull would rather hit an enemy with its horns moving up and higher. However, a bear tends to swipe his paws downward and pin the opponent on the ground.
That’s interesting, but there’s more…
As these two attacking styles have been clearly defined, financial markets and analysts have started using them to reference different market cycles and macro trends. Understanding how these two terms are coined among financial analysts clarifies how the market directions are interpreted.
What Does a Bullish vs. Bearish Market Mean?
There is a remarkable difference between bullish and bearish markets. In the next section, we will explain how bullish markets and bearish markets work, their characteristics and more.
Bullish Market Trend Explained
A bull market is an upward trend in financial markets where the price of stocks, commodities, cryptocurrencies, or forex move higher. A bull market can also be referenced to the real economy.
For instance, when cryptocurrencies and stocks move higher, the real economy is also producing and expanding. During the general bull market phase, people tend to spend more. Companies search for new investment opportunities or expand their products and services.
When we talk about cryptocurrencies, we see decentralized platforms attracting many users. Transaction fees become higher and transfers take longer to be processed. This shows there is a large activity in the crypto space.
During bullish markets, investors tend to make more money in the financial market. As long as they have a clear risk management strategy, it is highly probable they could register profits during bullish markets.
Is registering profits as easy as it sounds?
No. It is not easy to trade. Indeed, bullish markets tend to have corrections along the way to the top. These corrections usually help to take out investors from the bullish market. The investors that sell during bullish markets are called “weak hands.” Strong hands, instead, increase their positions when a dip takes place.
Bearish Market Trend Explained
As bull markets represent positive trends, bearish trends show negative trends in stocks, cryptocurrencies, or other financial markets.
When we talk about the bearish trend in a real economy, it refers to situations in which companies are winding down, employees are laid off and investment plans are postponed for the future. In the crypto market, we might not see dApps registering new users, while trading volume falls and general interest for the market fades away.
Bearish markets drive the price of assets lower. During bearish markets, volatility grows and investors manage increased levels of fear, uncertainty and doubt. Nevertheless, during bearish markets, there is still a chance of making money.
Nowadays, several trading platforms offer users the opportunity to open long and short positions. Short positions help traders to make money when the market moves downward.
The Anatomy of Bullish vs. Bearish Markets
The following two sections will focus on the main characteristics of each of these macro trends. Moreover, there will be an entire description of how to spot bullish and bearish candlestick patterns.
Characteristics of the Bull and Bear Markets
Bull markets are characterized as being positive trends. Even inexperienced investors can make money just by opening the right position in the growing trend. There is no clear definition of when a stock enters into bullish territory.
However, we can always use some market data that helps us understand where the market is moving. When assets increase by over 20% in a period of just a few weeks or months, then we could be witnessing the beginning of a more significant trend.
Bitcoin’s bull trend Oct 2020-April 2021
A confirmation of bull trends can be found by looking at major indices. For example, if we see Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), and most of the ERC-20 tokens grow for several months, then this would be one of the main characteristics of a bull market.
Another critical characteristic of bull markets is related to investors’ confidence. When we see crypto Twitter providing extremely high price predictions, we have high chances of being in a bull market.
But what about bear market characteristics?
The main characteristic of bear markets is falling prices. You could expect Bitcoin and other digital assets to suddenly move lower by over 20% — not in days, but in hours. If the trend stabilizes and continues some days later, then it is highly possible we are in a new bearish trend.
As we mentioned before, fear, uncertainty and doubt are the main feelings among investors when we have a bearish market. This gives rise to the acronym FUD. It shows investors prefer to stay on the sidelines rather than actively participate in the crypto market.
Identifying Market Trends With Candlestick Patterns
Technical analysts tend to have a set of candlestick patterns that help them open trades when a bull market changes into a bear market, or vice-versa. Candlesticks share a lot of information about the sentiment of investors and can be vital elements for analysts.
In long-term time frames, candlestick patterns provide valuable information on whether a trend is changing, or if a top or bottom has been reached. Although these candlestick patterns are not bulletproof, they can guide traders in managing their positions.
Some of the most popular bullish candlestick patterns include the following:
- The Hammer
- The Inverted Hammer
- Bullish Engulfing
- Morning Star
Some of the most popular bearish candlestick patterns include the following:
- Evening Star
- Hanging Man
- Doji Star
- Three Black Crows
Trading the Bullish and Bearish Sentiments
To trade bullish and bearish markets, one should follow different indicators. Some of them include the volatility index (VIX), the bullish and bearish percentage index and moving averages.
Using Sentiment Indicators
Volatility Index (VIX)
The CBOE Volatility Index, also known as VIX, is an index that measures volatility expectations for the next 30 days. This tool is handy for understanding the market sentiment, including the fear or greed among investors.
Although the VIX index focuses on traditional financial markets, as the cryptocurrency market becomes more correlated with stocks, it may be possible to draw some conclusions. Analysts should always take different indices into consideration.
When the value of the VIX grows, there is a high probability the market will fall. The contrary wouldhappens when the VIX moves lower. In the last case, the market would head higher. Nevertheless, this is just one indicator and should be used alongside other analytical tools.
Bullish and Bearish Percentage Index
The Bullish Percent Index (BPI) is an indicator that can be used to get information about market health. Many analysts and investors have used this breadth indicator. It shows the percentage of stocks on point and figure buy signals.
The BPI measures the total number of stocks moving higher or lower. In this way, traders can have a clear idea of where the market sentiment is heading.
The index fluctuates between 0% and 100%. When the indicator is above 50%, we might have a bull market (moving higher). Similarly, when the index is below 50%, then the market is favoring the bears. Overbought and oversold conditions can be seen as soon as the indicator rises above 70% or drops below 30%, respectively.
An oversold market might be at a point of inflection where bulls could soon appear and change the direction of the trend. An overbought signal could show that bears may take control of the market, or that there could be a pause before the trend resumes.
Moving Averages (MAs) are some of the most utilized technical indicators for trading digital currencies. They are used to smooth price trends and reduce the noise of sudden spikes or price drops, which are very common for cryptocurrencies.
Bitcoin 200-day, 100-day, and 50-day moving averages
The most common moving averages used to trade digital assets include the 50-day, 100-day, and 200-day. Buying and selling signals in both bull and bear markets to open or close positions.
In addition to traditional moving averages, there are also Exponential Moving Averages (EMAs).
Are EMAs better than traditional MAs?
Actually, they just share different information. EMAs focus on the recent price action rather than on the general trend. EMAs give more importance to how the market has behaved in the short term, rather than using older price data.
Most of the successful traders in the cryptocurrency market use both indicators. At the same time, when the 50-day, 100-day and 200-day MAs cross, there could be open or closed positions.
Catching the Change of Trends
Discovering an inflection point in the market is a difficult thing to do. It requires that traders use different tools that would show similar results. When the market changes from bullish to bearish, it is usually possible to spot a top.
This top is a price level reached after an increased trading volume, and in a short period of time. As soon as the top is reached it rapidly changes direction. Moreover, if the market tries to move higher again, it will get rejected many times.
When the trend starts to change, it is helpful to understand whether this is a short-term change or a long-term macro trend. Position traders can open a short position if the market moves from bullish to bearish.
Short-term traders typically buy and sell the fluctuations that take place on the crypto trading pair they trade. Scalpers might use every single market movement to make profits with these fluctuations.
Challenges to Anticipate in Bullish vs. Bearish Markets
Both bullish and bearish markets have challenges that must be faced and understood by traders. During a macro trend, one of traders’ main challenges is avoiding falling in bear or bull traps. Staying focused on the macro trend (bullish or bearish) is one of the best ways to avoid unwanted results.
Another challenge that traders face in both bullish and bearish markets is their emotions. While intuition can be a good characteristic for traders, emotions may negatively impact investors’ performance.
During bull trends, there will be numerous price drops. Many traders exit their positions as soon as there is a price decrease. This generates a situation in which the investor realizes that the price drop was momentary and that the bull trend was intact.
The same happens in bear markets. As soon as there is a move higher, many traders enter the market at the top of this price increase, only to realize the market keeps falling.
Bullish and bearish markets are key parts of financial and cryptocurrency markets. Traders must understand their characteristics and features to be successful with their trading activities.
Using a comprehensive set of trading indicators is one of the best ways to improve success rates. Nevertheless, there are some challenges that traders must acknowledge. Leaving emotions aside, and trading with the help of fundamental and technical analysis, are some of the best ways to face price fluctuations.
The cryptocurrency market is expected to go through many bull and bear markets in the future. Now that we are in a bull market, are you ready to hit the top with some newly found strategies?