Introduction
Market trend is the most fundamental aspect of financial markets. A market trend is the general direction of movement of an asset or market. Thus, market trends are closely monitored by both technical and fundamental analysts.
Bull markets tend to be relatively easy to trade as they allow for very basic trading and investment strategies. Even inexperienced traders can succeed in favorable bull market conditions. At the same time, it is also important to understand the cyclical movement of markets.
So what do you need to know about bull markets? How can traders use bull markets to their advantage? About everything in our article.
What is a bull market
A bull market (or bull run) is a financial market condition in which prices rise. The term "bull market" is usually used in the context of the stock market, but it can be used in any financial market, including Forex, bonds, commodities, real estate and cryptocurrencies. A bull market can also refer to a specific asset, such as Bitcoin, Ethereum or BNB. And even to a specific sector, for example, utility tokens, privacy coins or biotech stocks.
You may have heard Wall Street traders use the terms “bullish” and “bearish.” In a bull market, investors expect prices to rise; in a bear market, they expect prices to fall.
Bullish sentiment can also indicate traders are going long, although this is not necessarily the case. Bullish sentiment does not always mean there is an opportunity to go long right now. Prices are simply rising or are expected to rise.
It's also worth noting that during a bull market prices can still fall and fluctuate. This is why it makes more sense to view bull markets on larger time frames. Thus, bull markets can contain periods of decline or consolidation without disrupting the underlying market trend. Next, let's take Bitcoin as an example. Although we may see periods of decline and a few market crashes, this does not contradict the overall upward trend.
Bitcoin price chart (2010 – 2020).
So, the definition of a bull market depends on what time frame we are talking about. Typically, we use the term bull market when talking about periods of months or years. However, as with any other market analysis tool, trend lines on wide time frames are usually more reliable than those on narrower time frames.
Thus, in a bull market with a long time frame, there may be extended periods of decline. These counter-trend price movements are known to be volatile, although this is not always the case.
Examples of a bull market
The most famous examples of bullish trends can be found in the stock market. During such periods, stock prices and market indexes (such as the Nasdaq 100) skyrocket.
As for the global economy, it fluctuates between bull and bear markets. These economic cycles can last for years or even decades. Some say the bull market that began after the 2008 financial crisis and continued until the coronavirus pandemic was “the longest bull market in history.” This may or may not be true. As we've already discussed, bull markets with longer time frames can be priced differently.
That said, let's take a look at the long-term performance of the Dow Jones Industrial Average (DJIA). It was basically a century-long bull run. Of course, there are periods of decline that can last for years, such as in 1929 or 2008, but the overall trend is still upward.
DJIA performance since 1915
Some argue that we may see a similar trend with Bitcoin, but it is impossible to say for sure if or when Bitcoin will face a multi-year bear market. Also note that most other cryptocurrencies (such as altcoins) will never experience similar price increases, so be careful about what you invest in.
Difference between bull and bear markets
These are two opposing concepts, so it's not that hard to see the difference. In a bull market, prices are constantly rising, while in a bear market they are falling.
This also leads to differences in trading patterns: in a bull market, traders and investors usually prefer long positions, and in a bear market, short or cash.
In some cases, holding funds in cash (or stablecoins) can also mean shorting the market as prices are expected to deviate. The main difference is that cash is used to preserve capital, while shorting is used to profit from declines in asset prices. But if you sell an asset in hopes of buying it back at a lower price, you are short, even if you don't directly profit from the decline.
There are also fees to consider. Holding stablecoins will likely not incur any fees since there are typically no storage costs associated with this method. However, many short positions will require you to pay a funding fee or interest rate to keep the position open. This is why quarterly futures are ideal for long-term short positions - there are no financing fees.
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How traders use bull markets to their advantage
The basic idea behind trading bull markets is relatively simple: prices are rising, so going long and buying the dip is a smart strategy. This is why buy-and-hold strategies and dollar-cost averaging usually work well in long-term bull markets.
Traders often say: “A trend is profitable until it ceases to be profitable.” That is, it is better to trade in the direction of the market trend. However, no trend will last forever, and the same strategy will not work in other market cycles. The only thing we can confidently say is that markets can and will change. As the COVID-19 pandemic has shown, a multi-year bull trend can end in just a few weeks.
Naturally, in a bull market, investors will be optimistic as prices rise along with overall market sentiment. However, even during a bull market, some investors will remain bearish. They can even benefit from short-term bearish trades and shorting if the trading strategy takes it into account.
Thus, some traders will try to short price highs in a bull market. However, these are advanced strategies that are more suitable for professional traders. For less experienced traders, we recommend trading according to the trend. Many investors suffer losses trying to go short in bull markets. After all, being in front of an angry bull or a locomotive is a dangerous thing.
Summary
We discussed what a bull market is and how traders can profit from it. Generally, the simplest trading strategy for any market trend is to follow the direction of the overall trend.
Thus, bull markets can provide good trading opportunities even for novice investors. However, it is always important to manage risks properly and continue to learn to avoid possible mistakes.
