The global market is extremely volatile. Especially today when the world is immersed in economic uncertainty, political turbulence and trade disputes. Therefore, to be a successful investor or trader, you have to know how to act in the given market environment, regardless of its mood swings. It doesn’t really matter if prices rise or fall – there is always an opportunity to make money. In this article, we cover all the basics you need to know to feel confident in the bull market.
What is a bull market?
If you are familiar with the investing world, you may have heard the terms "bull" and "bear" many times. These are commonly used to describe market conditions.
So, what is a bull market? A bull market is usually used to refer to a market that is on the rise. The term can be applied to a variety of securities, including stocks, bonds, commodities, currencies and pretty much anything that is marketable. Since prices of securities fluctuate continuously during trading, the term "bull market" is typically used to describe prolonged periods in which a large portion of securities are increasing in prices. There's no exact numeric measurement, however, it commonly refers to the market where prices rise by 20% or more over the period of two months or more.
A bear market, on the other hand, defines the market that is in decline. Securities prices are continuously falling, resulting in a downward trend.
Now you might wonder how all these mammals got into finance. If to speak about the name origins, there are actually a few theories about where the “bulls” and “bears” got their names from. The most popular one is that these derived from the different ways the two animals attack their prey: a bull thrusts upwards with its horns, and a bear swipes downward with its paws. These zoological terms were metaphorically applied to the corresponding market movements.
Bull market examples
Over the past century, the world has witnessed a number of bull markets. For example, if to take a look at the history of the S&P 500 Index, one of the most frequently traded indices that reflects the US stock market the best, it has seen 13 bull markets since the Great Depression.
What is the average bull market length?
According to the First Trust Advisors’ historical research, on average, a bull market lasts about 6.6 years and generates a cumulative return of 334%.
However, it is almost impossible to predict when the market trend might reverse. Part of the difficulty is that speculation and psychological effects may often play a key role in shaping the market’s future.
Why do markets go “bullish”?
Bull markets are usually triggered when there’s a lot of demand. When prices start to rise, investors want to buy into the market to get a piece of the action, believing that the uptrend will continue for the long term. Due to the investors’ high confidence, more and more people start entering the market. The higher prices are chased as demand supports higher valuations. This phenomenon has a domino effect that results in a psychological matter known as herd behaviour, leading to more money being thrown into the markets.
Bull markets usually happen when economies are strong and employment levels are high across the board.
How to invest in a bull market
In a bull market, the best thing an investor can do is to buy securities early in the trend and sell them when they have reached their peak in order to take maximum advantage of rising prices. Even though it may be rather difficult to determine when the bottom and peak are likely to occur, modern trading offers a multitude of technical indicators, analytics tools and advanced charts, which can help you to study the trends and search for patterns.
Note that most losses in the bull market tend to be temporary and minor, allowing an investor to keep actively investing in more securities with a higher probability of making a return.
In fact, there are a plethora of methods and strategies that can be implemented when investing in a bull market. All of them come with a set of advantages and disadvantages and carry different degrees of risk.
Another popular strategy is to invest in securities while they are in their retracement period. Assuming that the bull market continues, the idea behind this method is that the price of the security will quickly go up again, retroactively providing an investor with a discounted purchase price.
Active trading is another approach to profit in a bull market. It includes a variety of trading methods, such as day trading, scalping and swing trading. It is known as the most aggressive way of trying to capitalise on the rising markets. Employing this strategy to get maximum returns, investors actively participate in the market, using short-selling and other techniques.
However, one of the most popular ways to start bull market trading is through contracts for difference (CFDs). These are ideal when you want to profit from a rise in the price of a specific security or company. Without the need to own the actual asset, CFD trading provides you with an opportunity to use leverage, which can be as high as 1:200. It essentially means you can control much larger volumes of shares by depositing a smaller initial amount of capital. It also significantly magnifies your potential gains, as well as your potential losses.
It is always important to arm yourself with as much knowledge as possible before making any investment decisions. For that reason, we suggest you read more about CFDs and various trading strategies with the guides provided by Capital.com. Moreover, you can check out our free online courses to get a better understanding of modern financial markets and the way they work.