A Guide to Bull and Bear Markets
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There are two sides to a coin; actually, there is three, but we won't get into semantics. The weather is also the same; we have periods when it's hot and cold, with everything else in between. Furthermore, the trading markets are no different. The industry experiences times when prices rise, also known as a bull market or fall, a bear market, and when there is barely any movement or stagnation.
As a trader, you need to understand how each affects your trading strategies and be ready to pivot as conditions change. This piece will explore bull and bear markets and let you know how to trade in both. So keep reading to learn more.
What is a Bull Market?
In short, a bull market is a period of rising prices in the equity markets. It's characterised by a jump in instrument prices, such as company shares and stock, by more than 20% from a previous low. The market's sentiment is positive, lasting for months or even years. Furthermore, the market still experiences regular dips and peaks, but the general direction of the prices is up.
Bullish conditions also tend to be the most prevalent in the stock market industry, and it's not uncommon to see prices rising to new all-time highs during this time. This makes them an excellent time to buy and hold securities to benefit from the overall upward trajectory of the market.
In addition, even though it can be challenging to tell precisely when a bull market starts, it ushers the end of a bear market. While on the contrary, the end of a bull run also marks the beginning of a bear market.
How to Trade in a Bull Market
1. Buy and Hold
This strategy works just like its name suggests; you buy stock and hold it to sell when its price rise. The best time to buy is at the end of the bear market when prices are at their lowest and sell before the end of the bull run. However, if you don't buy at the beginning of a run, you should be fine. You can buy at any time and still make a good profit because the market is constantly rising.
2. Momentum Strategies
Trading with momentum strategies means following the upwards movement of price. You look for stock options that are rising in price and that you still expect to keep growing, then buy them and sell once the trend reverses. The reasoning behind this strategy is that stock that has grown in the medium term will continue to rise in the near term.
3. Growth Stock
This strategy involves identifying stock that is underpriced in the market and buying in before it grows and receives a fairer valuation. It's a slightly more risky way of investing, but the payoff can be significant if you find the right growth stock.
What is a Bear Market?
A bear market is the contrary of a bull market, and falling prices and weakening economic conditions characterize it. It starts when stock prices fall by 20% from their previous high and can last for months or years. Furthermore, if stock prices drop by 5% in a day, it can be defined as a bearish market, and it may trigger widespread sell-offs in fear of a full-blown bear market. In situations like this, having a stop-loss on your positions can help prevent any massive losses.
However, unlike its counterpart, bear markets tend to unfold more quickly and don't last nearly as long as bull markets. But because of drastic price swings and high volatility experienced during these conditions, the market sentiment is primarily negative, and traders tend to be wary about investments. Trades can be risky and lead to high losses if you're not well-versed in trading in such environments.
How to Trade in a Bear Market
1. Sell off Stock and Buy Back in Later
Instead of watching all your gains erode and hoping to make them back later when the markets turn. You can sell your stocks while they are still worth something and hold on to the cash. Then once the market turns, repurchase your stock, hopefully for a lower price, and ride the wave to the top.
2. Short the Market
Shorting the market is one of the best ways of taking advantage of falling stock prices. This involves borrowing shares while still selling at a high price, selling them, and waiting for them to fall even further. Then use your proceeds to buy back the amount you borrowed at a lower price, pay off your debtor, and pocket the difference. However, this can be risky, and you should be sure about the conditions.
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