Decide Your Bias – Bullish or Bearish

The bulls and bears roam Wall Street and other stock markets. However, for the newcomer, spotting a true bull or bear market can be difficult. These are more than short-term price movements – they are long-term trends.

Recognizing bull and bear markets

Let’s start with a bear market. A bear market is when prices are trending down for an extended period of time. An easy way to remember this is that a bear swipes down with its claws when it attacks. In general, look for a market that has been falling for at least two months – perhaps with occasional corrections – and prices that have fallen more than 15% to 20%.

A bull market is the opposite. Here, prices have been rising for an extended period of time – two months or more with 15% or better gains. The easy way to remember this is that a bulls horns point up.

Deciding your bias

The terms bull and bear are not just used to talk about the direction of the market. They also refer to each investor’s individual bias toward the market – do they believe that the market will go up (bull) or down (bear) in future? It’s important to make this decision before you trade, whether that is stocks, forex, futures or anything else. This decision drives your trading strategy. For example, if you believe that we are in a bull market, you may want to trade on the long side of certain markets and currencies. On the other hand, if you’re confident a bear market is in process, then a different strategy may be called for and you may want to purchase safe haven currencies or short certain stocks.

Bull market strategies

There are actually many different bullish strategies that you may want to use. Obviously, the simplest one is simply to buy the stock – this is probably the most familiar, but there are many more. For instance, you could buy a long call option, which gives you the right – but not the obligation – to buy a stock at a certain price in the future. For example, you could buy a long call on a stock at $20. If the price then goes up to $30 before the option expires, then you make a profit since you can buy the stock at $20 and sell it at $30. There are also lots of other approaches available, ranging from short puts and covered short calls to more esoterically named options such as the Jade Lizard. However, all of these are designed to take advantage of the stock price going up – and the one you choose depends largely how large a move you anticipate and how confident you are in your bias.

Bear market strategies

Similarly, there is a long list of different strategies that you can use in a bear market. Again, these are all designed to take advantage of the equity price declining. The most obvious is to short sell the stock, but you can also use a short call, long put and a dozen others – and yes, there is a reverse Jade Lizard.

Markets can be neutral

Keep in mind that not every market is a bull or bear market. Often, markets will meander aimlessly for long periods of time. There are a number of strategies you can use when the market is neutral, but there are far less available than when you are bullish or bearish.

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