Explaining Bear and Bull Markets
Bear and bull markets are terms that are commonly used to describe the state of the market and while it is a simple analogy, the effects are complex and very important to any investor.
Basically, the term bear market is used to describe a market in which the prices are on the downward trajectory and bull market denotes markets where the prices are rising. Since the market prices are often determined by the investors’ mindset, this is a good indicator of upcoming trends.
When the market is in the bull phase the prices are up, people are confident and looking for opportunities to invest their money. The willingness to tackle riskier investments also generally increases.
In Forex trading bull markets usually lead to increased demand and rising prices of currencies such as the Canadian dollar (CAD) and Australian dollar (AUD). Currencies of emerging market economies like Brazilian real (BRL) and Russian ruble (RUB) will likely also gain value.
Correspondingly, when the confidence is high and the prices are rising in a bull market, we commonly see a decline in safer options – the safe haven currencies that are most in demand when the market is falling and investors prefer stability and security. The most common safe currencies are the US dollar (USD), the euro (EUR), the Swiss franc (CHF) and the Japanese yen (JPY).
What Does That Mean for Investors?
One of the major advantages of forex trading is that it offers trading opportunities in both the bull and bear market situations. Forex trading is customarily done in pairs – the value of one currency in comparison to the other currency in the pair. When some currencies are falling, others are gaining value, which means that whether the market is descending or rising, there is always an advantage.
As mentioned before, bear and bull markets can indicate future currency trends, so it is important to keep track of the current situation. Understanding market direction will help you properly assess risk and make the best decision when to enter and close your trades. Investors in a bull market usually try to purchase currency as soon as the price is rising, and sell once they believe it has peaked.
The situation in a bear market is opposite to the bull market, which means that prices are falling and the supply is bigger than the demand. Since the price is dropping, investors are looking to sell off their declining equity and giving up the riskier options in favor of safe haven currencies to weather the storm.
Safe haven currencies like the Swiss franc (CHF) or Japanese yen (JPY) are less volatile and will fare better in times of financial tumult, backed up by strong and stable economies.
What Does That Mean for Investors?
In bear markets the risk of loss is significant since the prices are dropping and there is no certainty when the upturn will occur. The safest option is to turn away from emerging currencies, that carry more risk, in favor of the usual safe haven options, that are more likely to gain value or hold ground in a declining market.
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