When you are just learning to trade, the terms bullish and bearish are of course familiar. However, not all novice traders understand the true meaning of these two terms. Someone might be wondering, what does bulls and bears have to do with trading?
Or why if the chart is rising it is said to be bullish and bearish if the price is going down? It does not stop there, some of you may also ask, what is the importance of understanding the meaning of ascendant and bearish?
This article thoroughly discusses the origins of these two terms and their meanings in trading, so that later you will know the important reasons for understanding the upside and downside trend when you are directly involved in trading.
The origin of the terms Bullish and Bearish
The term bullish comes from the word “bull” which in English means bull, while the term bearish comes from the word “bear” which means bear. In market price action, the two terms refer to the movement patterns of bulls and bears when they attack their opponents. The bull will tease his opponent until he is thrown while the bear will whip his opponent.
If you pay attention, the movements of these two animals will resemble the movement of the rise and fall of market prices, as well as the way market participants make their decisions to enter the market.
If the price action in the market tends to go up, it is called bullish or like an attack by a bull charging from below and then catapulting its opponent up. Conversely, when the price is going down in the market, it is called bearish, like a bear standing up and then hitting its opponent down.
What is the Bullish?
In a bull market, the economy is doing well, unemployment is falling, GDP is increasing, and prices are also rising. This market is characterized by optimism, high expectations, and investor confidence in the asset.
This situation is characterized by a sharp rise in prices, although there are often downward corrections. In fact, the direction of the main trend movement remains upward or the push for a price increase is stronger.
Traders who take advantage of market growth in search of profits are known as bulls. They tend to enter long positions in the hope that they will be able to resell them in the future at a higher price. Therefore, a bullish market trend will show a gradual increase in price over a period of time.
What is Bearish?
Unlike in bullish conditions, in a bear market, the economy falters, unemployment rises, GDP falls, and consumer spending falls. This market is characterized by pessimism, low expectations, and the investor’s lack of confidence in an asset.
This situation is characterized by a sharp decline in prices, although in reality price corrections often occur upwards, but the direction of the main trend movement remains downward or the pressure on downward prices is stronger.
Traders who take advantage of market declines in search of profits are usually called bears. They tend to enter short positions in the hope that they will be able to buy them back in the future at a lower price. Therefore, a downward market trend refers to a gradual decline in prices over a period of time.
How to identify rising and falling markets
A bull market can become bearish at any time, and vice versa. A trend reversal or trend reversal usually occurs after the market has moved into an oversold or overbought area. There are two easier ways to see and define the boundary between bullish and bearish market conditions, i.e. by looking at price chart patterns and using a moving average.
Price chart patterns
You can spot trends by looking at price chart patterns. If the market is in an uptrend, the price chart pattern should consist of high-high-high-low. Meanwhile, in a downtrend, make sure that the price chart pattern that has been formed is Low-Low-Low-High.
For the moving average, you can use the 200-day simple moving average or the 200-SMA. The SMA-200 indicator can show the long term trend. If the price moves above the 200-SMA, it means that the market is likely to be bullish.
Conversely, if the price crosses the SMA-200 line from top to bottom and moves below the indicator line, the trend tends to be bearish.
When you are able to identify market conditions, this knowledge will be helpful in making decisions about what type of trading strategy to use, trend following or counter trend?
Beginners are usually advised to use trend-following strategies, as they tend to be safer than counter-trends. However, keep in mind that any trading strategy still carries high risks, especially if it is not balanced with knowledge of good entry and exit levels.
Up and down to determine entry and exit levels
Predicting whether the price will be bullish or bearish is useful for determining entry and exit levels, you know! To make it easier to understand, let’s use the following example.
Budi predicts that XAU/USD will move higher because the US dollar will mainly weaken. Because of this, Budi entered a “buy” position at $1774 with the hope that XAU/USD will rise. After Budi entered the position, XAU/USD actually fell to $1769 and Budi took a loss due to his stop loss being touched. Shortly thereafter, when the price reached $1,767, XAU/USD rose again.
According to Budi’s forecast, it turned out that XAU/USD was indeed bullish and continued to rise to $1,790 near the market close. The incident occurred only after XAU/USD fell and Budi took a loss.
From this example, we can conclude that a mistake in predicting the direction of price movement, whether it is bullish or bullish, can have a fatal effect on your transaction. Therefore, you need to build a correct exit strategy, so do not regret it if the profits you get are not perfect, or let trades float for a long time.
Hence, it is important for you to know the right entry and exit points after learning to identify the direction of the market trend. Entry and exit levels should be planned before opening a trading position.
Besides planning these entrances and exits, you also need to make a backup plan; What to do if it turns out like this and what if it happens later instead. Don’t forget to learn about good risk management and money management, okay?