Winning traders are aware of the basic, fundamental differences between bull markets and bear markets. Knowing the different characteristic patterns of the two basic types of markets can make your trading significantly more profitable.

Markets “push” upward. They “fall” down. Pushing is slow and difficult; falling is fast and effortless. Something has to happen – there has to be a reason – for a market to work its way higher. Otherwise, it’s natural tendency is to fall. Bull markets are a long, protracted struggle to reach the summit; bear markets are a crash, a sudden, drastic fall, that happens (figuratively speaking anyway) in the blink of an eye. In short (no play on words intended), markets go down much more easily than they go up.

Market tops occur as sharply pointed peaks – they are quickly made and quickly abandoned by subsequent price action. In contrast, market bottoms generally occur as troughs – they take time to form, and the bottom tends to be tested several times, as if the market were double-checking the solidity of its foundation before attempting to “build” higher. A good rule of thumb for trading is, “A bear market always goes a little lower, and lasts a little longer, than you think it will.” Traders trying to “buy the bottom” often make the mistake of entering a market too early, and therefore getting flushed out for a loss in the final push downward before the market does indeed turn back to the upside.

Market tops invariably take most traders by surprise. As rare as buying the bottom is, it is infinitely more rare for a trader to manage to sell the top. Tops come quickly, because once they arrive, “panic selling” slams the market to the downside. Panic selling is always a stronger phenomenon than panic buying. I guess one way to phrase that would be, “Bulls scare more easily than bears.” It’s just generally true that bull markets are more skittish, more fragile, than bear markets.

Temporary reversals, market corrections, occur more frequently and intensely in bull markets than in bear markets. Therefore, for example, it’s much easier to successfully utilize a trailing stop in a bear market than in a bull market. If you’re facing the right way in a bear market, odds are that you won’t get stopped out prematurely unless you run your stop-loss order much too tightly. But in a bull market, it’s quite probable that buyers will be stopped out more than once during reversals that take place over the entire course of the movement upward – because of this fact, it’s necessary to have a good re-entry strategy if you want to ride a bull market long term.

Finally, bull markets tend to be much more “news sensitive” than bear markets. The slightest rumor can significantly affect price action in a bull market, at least in the short term. Bear markets, on the other hand, are notorious for ignoring news, be it bullish news or bearish news. I have often seen traders confounded when an unexpected, extremely bullish crop report fails to move a market to the upside. But knowledgeable traders expect, and thus can take advantage of, such non-reactions by an overall bearish market.

Likewise, bear markets are less susceptible to seasonal tendencies than bull markets are.

In conclusion, there are distinct differences in the basic operational patterns of up markets and down markets. Being aware of these differences, and keeping them in mind when making trading decisions, will enable you to both increase your profits and minimize losses.

Halston Adams
www.futures-trading-strategy.com

Categories: Trading

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