Bullish vs Bearish in Forex – What’s the Difference?
If you’re new to the financial or forex marketplace, you may have heard the terms ‘bull’ and ‘bear’ markets used by seasoned traders and analysts alike.
Although the use of such jargon can be overwhelming for beginner forex traders, these two terms describe relatively simple concepts that outline the general conditions that define a particular market.
We’ll explore the concept of bullish and bearish markets below, while appraising the characteristics of each one.
Bull vs. Bear Markets – The Key Considerations
If we start with a bull market, this describes a sector that’s on the rise and benefitting from generally favourable conditions and rising valuations.
Conversely, a bear market exists in an economy that’s contracting and where assets such as stocks and currencies are depreciating in value, usually over an extended period of time.
On a fundamental level, the terms ‘bullish’ and ‘bearish’ also denote how investors feel about a particular market and the conditions in which they have to trade. In this respect, they hold significant importance, particularly as all financial markets are influenced by sentiment and investors’ attitudes to one degree or another.
To understand this further, let’s look at the burgeoning cryptocurrency market, which is largely driven by sentiment and how assets are perceived by investors. Through Q4 of 2020 and the first two quarters of 2021, the crypto market enjoyed a so-called “bull run”, which was defined by sustained and exponential price growth and increased demand.
However, the market subsequently turned, as bearish sentiment took hold and assets such as Bitcoin shelved nearly 50% of their value in less than three months.
This represents a ‘true’ bear market, which is defined by conditions where a sector has depreciated by 20% or more from recent highs.
In the world of forex, bullish sentiment also triggers increased confidence and trading volumes, while the overall acceptance of risk rises markedly. This is most likely to benefit the market’s most liquid and in-demand assets, including the Australian dollar (AUD) and the Canadian dollar (CAD).
As sentiment in the foreign exchange turns bearish, however, we tend to see the appreciation of so-called “safe haven” currencies, including the Japanese yen (JPY), the Swiss franc (CHF) and, in some select instances, the US dollar (USD).
What are the Characteristics of Bull and Bear Market?
As we can see, bull and bear markets are largely defined by the direction of asset prices and the prevailing sentiment, but there are a number of other characteristics that investors should be aware of. These include:
#1. Supply and Demand for Securities
In a bull market, there remains a strong demand for securities, which is usually accompanied by a weakening supply.
More specifically, this market sees instances where investors are keen to buy securities but traders are less willing to sell, causing prices to rise as individuals compete to execute trades.
However, in a bearish forex market, there’s a tendency to sell or short assets rather than buy, causing a sustained decline in demand and subsequent fall in valuations.
This was borne out last year during the coronavirus pandemic, as base interest rates were slashed across the globe and currencies shelved value (along with the level of interest that they generate amongst overseas investors).
#2. Investor Psychology
We’ve already touched on the role of investor psychology, which plays a pivotal role in how markets perform over an extended period of time.
Certainly, there’s a huge correlation between investor psychology and the performance of the forex market, with bull markets tending to see an increase in trading activity and demand as potential profitability soars.
As negative sentiment is sustained during a bear market, investors begin to move their capital out of international currencies and instead seek out fixed-income securities such as bonds.
As this trend continues, demand and prices fall further, triggering a further exodus from the marketplace over time.
You can also read about Forex on the Forbes website.