Bull Market

Trading Basics

Bull Market

A Bull Market is any financial market where prices are rising or are expected to rise. The confidence that traders have in the Bull Market generally fuels the market further, causing more investment and prices to continue to rise.

Bulls are optimistic traders who believe that the price of the markets they trade in is going to increase.

When thinking of Wall Street and trading, most people will subconsciously have a picture of a bull on their mind. There is even the famous Charging Bull sculpture that stands in Manhattan, in the heart of a financial district, created by the Italian artist Arturo Di Modica.

But what is the common ground for bulls and trading, and what does a bull market stand for? You’ll find out in the following lines.

Bull Markets Explained

A bull market is a market where prices are rising or expected to rise in the future. While the term is mostly used to refer to the stock market, other markets can also be in a bull market, including commodities, currencies, and bonds, for example.

Bull markets can last for months or years. If the price of a financial instrument rises for only one day, that’s not enough for the market to be called a bull market. Instead, prices have to rise for a prolonged period of time. On their way up, prices usually form counter-trend corrections when prices are falling. Even then, a market can still be called a bull market if the overall direction of the price is up.

Bull markets are usually difficult to predict, which is why most investors and traders stay at the sidelines until they see a clear pattern of rising prices in the market. Recently, the US stock market has been in a strong bull market since 2009, marking one of the longest periods of rising prices in the US stock market history.

How to Identify Bull Markets?

Bull markets can be easily identified by a market condition where prices continuously rise. A bull market is a market in an uptrend that forms consecutive higher highs and higher lows. Each higher high breaks the resistance of the previous high, and the higher low doesn’t exceed below the support of the previous higher low.

The following chart shows a typical bull market.


As you can see, prices don’t go up in a straight line in a bull market. Instead, there are occasional price-corrections, which are counter-trend moves marked as swing lows (higher lows) on the chart.

Price corrections, or market corrections as some traders call them, are a normal phenomenon in financial markets caused by a number of reasons. One of the most important reasons is profit-taking: Traders and investors who have been long for some time are taking profits as the bull market continues, increasing selling pressure in the market and pushing prices down.

As prices decline, other market participants who missed the initial up-move in the market and have been waiting for the prices to fall start buying at the lower prices, joining the bull market, and pushing prices up again.

According to Charles Dow and his famous Dow Theory, market corrections usually reach around 50% of the initial up-move. Some traders use Fibonacci retracement levels to find areas where the price might retrace and reverse in the direction of the overall uptrend. Notable Fibonacci retracement levels include the 38.2% and 61.8% levels which are often respected by the price as a larger number of market orders are placed around them. We’ll discuss how to use Fibonacci levels to enter into a trend further below.

Bull Market Examples

Bull markets form all the time across various financial markets. Here’s an example of a bull market in the EUR/USD pair that lasted from March to September 2017. Notice the higher highs and higher lows (market corrections) formed by the price. When the price declines too much as a result of profit-taking activities, other market participants find this to be a great opportunity to buy and push the price further up.

Analysis of a trendline

Also, note the trendline that connected consecutive higher lows in the chart. Traders often use trendlines to spot trading opportunities as the price tends to retrace at trendlines and continue in the direction of the underlying trend.

Expert Tip: When trading trendlines, make sure that the price touched the trendline at least three times in the past. This will significantly increase the importance of the trendline.

Here’s another example of a bull market. The EUR/USD pair was forming consecutive higher highs and higher lows from May 2013 to May 2014 before the rising trendline finally broke. In this chart, notice how traders can identify that the bull market is losing momentum by the number of days required for the price to touch the trendline. As the period shortens, chances of a downside breakout increase.

Eur USD Chart

Markets like to trend and traders can find examples of active bull markets across many markets and timeframes. Riding a bull market is a popular trading and investing approach, where traders aim to buy low and sell high. In fact, almost all tools used by technical analysts have the sole purpose to identify trends and trend reversals in their early phases and to ride a trend until it reverses.

What Causes a Bull Market?

Bull markets form with a positive change in economic fundamentals and a bullish investor positioning in the markets. Other reasons that support the formation of a bull market include the crowd-following behaviour of market participants: As prices start to rise, an increasing number of traders and investors want to join the market and push the prices even higher, which in turn attracts new buying pressure, etc.

  • Economic Fundamentals – The primary reason that causes a fresh bull market is a change in economic fundamentals. Companies are an integral part of an economy, and when economic conditions improve, this usually leads to new orders and higher profitability of those companies. As a result, their stock prices increase and form a new uptrend. Economic fundamentals to follow include the GDP, labor market statistics, the housing market, and sentiment indicators, to name a few. The GDP measures the total value of goods and services produced in a country over a period of one year. Positive GDP growth usually means higher company earnings and rising stock prices, while negative GDP growth for two consecutive quarters signals a recession and the possible start of a bear market.

Unemployment rates, non-farm payrolls, and average hourly earnings are also important indicators to follow. When employment is rising, people have more money to spend which leads to higher retail sales. Bear in mind that consumer spending accounts for around 70% of GDP in a developed economy. The housing market is a leading indicator that can signal the future outlook for an economy. An increase in the housebuilding activity signals that people are confident in their financial situation, which is why new housing permits are considered a leading indicator.

  • Investor Positioning – Investor positioning on the market can have a strong impact on market prices. When investors get bullish on a stock or on the entire market, they tend to build up long positions in anticipation of higher prices. This increase in demand usually causes a rise in prices and supports the underlying bull market. One thing to note is that extreme positioning can sometimes cause a trend reversal, as there are no market participants left to buy (everyone who wants to be long is already long).
  • Crowd-Following – As prices rise, they attract more and more buyers. This creates a feedback loop where rising prices attract demand, which in turn pushes prices higher again. Crowd following is a very important driver of markets over the short and medium run.

Bull vs Bear Markets: Main Difference

So far, we’ve only discussed bull markets in this article. A bull market got its name from the way how bulls attack their prey, lifting them above the ground with their horns. In market jargon, this signals rising prices.

On the other side, a bear uses his clutches to bring the prey down to the ground, which in market jargon refers to falling prices. A bear market is similar to a bull market, only that prices are declining for an extended period of time, forming consecutive lower lows and lower highs along the way.

Another important difference is that prices tend to build up slowly during a bull market, but fall dramatically faster in bear markets because of fear among market participants.


Trading Bull Markets

Depending on your trading style and strategy, bull markets can be traded in a variety of ways. Here are the two most popular approaches to take advantage of a bull market.

  • Buy and Hold Approach – The buy and hold approach is perhaps the simplest and most popular approach to trade rising prices in the market. As its name suggests, an investor who buys and holds doesn’t trade actively in the market and wants to take advantage of rising prices over the long run. A buy and hold approach in the S&P 500 index would on average generate an annual return of around 7% for the last 100 years. Trading commissions don’t play an important role in this approach as the number of market transactions are rather low. However, since a “buy and hold” investor would keep his or her position open even during market corrections, the investor needs to account for the amplitude of negative price fluctuations over his holding period.
  • Trading Pullbacks – A more active approach to trading bull markets is pullback trading. When trading pullbacks, a trader aims to take a long position at the bottom of a market correction when prices are relatively low and exit at the top of an impulse move (the move that forms a fresh higher high.)

To identify the bottom of a market correction, traders usually use technical tools such as trendlines, channels, Fibonacci levels, and candlestick patterns. This trading approach generates attractive trade setups with tight stop-loss and high reward-to-risk ratios.

Here’s an example of a long position taken at the bottom of a market correction. The GBP/USD pair started trading in a bull market after the price formed a fresh higher high above a key resistance zone. Traders who missed the initial up-move could be waiting for a market correction to an important Fib retracement level to place their buy orders.

Remember, the more technical levels support and confirm a trade, the better the outcome. In this case, the price reached the 38.2% Fib level which aligns with the resistance-turned-support, offering a great opportunity to enter with a long position. A stop-loss could be placed just below the recent low at 1.5570, while the profit target could be set at the next horizontal resistance level.


Final Words

Bull markets refer to market conditions where prices are continuously rising or expected to rise in the future. In a bull market, the price forms consecutive higher highs and higher lows, where each higher high breaks above the recent high.

Bull markets form for a number of reasons, including changes in underlying economic fundamentals, investor positioning, and crowd following behaviour. Traders who follow changes in economic fundamentals, such as sentiment reports, economic growth, and labour market statistics can have a solid edge over other traders and anticipate the start of a new bull market.

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