Are you a “bull” or a “bear?” Do you even know what these terms mean? It’s understandable and perfectly OK if you don’t. Many forex traders struggle with them. It’s a holdover from the stock market, and it defines your basic view of the marketplace at any one given time.
It’s important to realise that the terms “bull” and “bear” are contextual. This means that a person who is “bullish” or a “bull” in one market environment may not be a bull in another. The same is true of a “bear.”
One of the many forex trading challenges is determining whether a “bull” or “bear” market exists and then what to do about it. Money can be made in either market, but some traders prefer to trade in one market over another.
So, being bullish isn’t necessarily an investment philosophy, but rather a view of the market itself – but only a view of the market as is currently exists.
What Are Bulls?
Bulls are people who generally believe that a market is, or will be, rising. When someone is a long-term bull or “generally bullish,” it means that they are generally optimistic about the future of the market.
In the forex market, it means that they’re generally optimistic about a particular currency pair’s direction. When the market moves up, they are validated in their opinion. Of course, when the market correction inevitably happens, they lose money. When whipsaws occur, they are usually seen as temporary phenomenon.
What Are Bears?
Bears are people who have a generally pessimistic view of the market. Now, many new traders often mistake being bearish as a sign that there is no money to be made in a market. This is not true. A bear does believe that he or she can make money, but how that money is made is very different from how a bull makes money.
When a bull makes money, he invests “long” or he opens a trade hoping that his investment increases in value. In forex, he hopes the market rises and he makes money.
A bear, on the other hand, hopes the market falls. He invests “short” or “goes short” on a currency and the downward movement will actually make him money.
This is a difficult concept to grasp in forex because most people are used to the idea of making money only when the market increases in value. But, even in the stock market, short sellers make money when stock prices fall.
They do this by borrowing stock at a predetermined price and then selling it for a lower price. The difference is profit.
In forex, a trader simply opens a position and then waits for a lower price. Then, when he exists, he receives his profit. Sometimes, he may simply use binary options – a form of betting on just the movement of the currency – to profit. With binary options, all a trader has to specify is what direction he thinks the market will move. If he’s right, he makes money.
What Approach Should You Adopt?
When you’re first starting out, it’s probably simpler to just track bull markets. While it’s not really all that much more complex to trade in a bear market, it does take some getting used to – even if it’s only psychological.
Samuel Watkins is a self-confessed Forex trading addict of many years. When he’s not trading, he’s writing about it in hopes of helping those new to the practice. Read his illuminating articles on various blogs and websites today.