Bear markets are the domain of pessimistic traders and falling prices, but it’s good to know your terms when it comes to trading, so let’s take a look.
Switch on the TV news and you’ll often hear the stock market being described as either in a “bull” or “bear” phase. Bear means that the market is trending downwards in a strong and sustained way. It means that prices are dropping, more people are selling than buying, and there isn’t much optimism to be had. A bull market is the opposite. In this case, prices are going up and traders feel confident that they’ll continue to see returns on their investments. That’s why there is a statue of a bull outside the Chicago stock exchange. It symbolizes the aggressive march towards prosperity.
Bull and bear are also used to describe markets for other types of assets too, including those for cryptocurrencies. These markets are not as big but they are a lot more volatile, and it isn’t uncommon to see long bear trends that feature 85% price drops. If that kind of slump happened in traditional markets then it would usually mean the end of the world, but in cryptocurrency markets, it’s not at all unusual.
A 20% price drop over a 60-day time period is usually enough for market speculators to declare that we’re in a bear market. It’s a sign that investors are pessimistic, and that they’ve lost confidence in market prices and indexes. When they feel that their assets are no longer able to make money for them they start to offload them. When supply exceeds demand like this, prices fall, and the trend becomes self-fulfilling.
That 20% price drop may be seen as the start of a bear market, but the signs that it’s going to happen aren’t always that obvious. Traders spend a lot of time looking at tools like moving averages (MAs), the Moving Average Convergence Divergence (MACD), the Relative Strength Index (RSI), the On-Balance-Volume (OBV), and others to try and foresee a bear market.
Bull and Bear Markets
As a rule, bull markets are driven by greed, and bear markets are driven by fear. That’s an oversimplification but it generally holds true. In a bull market traders are more optimistic, so more of them are pumping their funds into more assets. Demand rises and so this causes prices to rise too.
Between 1929 and 2014, US economists believe that we’ve had 25 bull markets and 25 bear markets. The average bear market loss was 35%, while the average bull market gain was around 104%. Such sustained trends help to show how market momentum keeps prices either rising or falling over long periods.
