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Bull vs. Bear: Tools for Navigating Both Kinds of Markets



Most forex traders want to stay active throughout the year, even as market conditions change. Whether you’re facing a bull market or a bear market, forex trading opportunities are out there for individuals who are willing to do the research and adapt their strategies.

The key to trading in any market is understanding the factors affecting price movements. Although uncertainty in market conditions is risky territory for any trader, volatility is a profit opportunity if you have the right tools at your disposal.

Here’s a look at some basic steps you can take to adjust your trading strategy based on changing market conditions.

Bear-Bull Relationships in Currency Pairs

Unlike with other investment trading strategies, forex has a unique relationship with bear and bull markets because forex trading involves two currency pairs from different countries—and these countries may be experiencing different market trends.

With forex trading, the interplay of bear and bull markets can create unique circumstances that traders can use to their benefit.

EUR/USD and USD/CHF, for example, are often inversely related to each other. If the U.S. dollar is strong, the value of USD/CHF will likely rise, which lets traders take advantage of an American bull market. But the U.S. dollar’s relative rise could be a sign of the euro suffering a bear market, which means that even as the USD/CHF pair goes up, EUR/USD goes down in value.

Traders can use these currency pair dynamics to find strong price movements in either direction when bull or bear market conditions develop.

The Importance of Tracking Economic Events

In both bear and bull markets, major economic events—ranging from domestic labor reports to geopolitical developments—can cause rapid and significant shifts to the valuations of currency pairs. No matter what the current conditions of the market may be, these economic events can be an early signal of volatility, triggering price changes for a number of currencies and currency pairs.

This economic activity is crucial to track for the following reasons:

Economic events can’t be predicted through chart patterns or technical indicators. 

A good trading strategy should incorporate information from as many different sources as possible. Economic events should be monitored alongside chart patterns and indicators to give you a more comprehensive view of your positions and trading opportunities.

Economic news is the best leading indicator ahead of related price volatility. 

While indicators and chart patterns can reflect market responses to economic events, they are lagging indicators to the changes brought by those events—and far less useful than simply tracking events themselves.

Bull and bear market conditions are closely tied to economic health and economic events. 

Regardless of the health of national economies or the global economy, new economic events can always change that outlook—and trigger a corresponding shift in currency prices. For traders struggling to find promising trade opportunities in bull or bear conditions, economic events could be the key to creating movement that leads to profit.

The Importance of Charts and Analysis in Bull and Bear Markets

If you’re an inexperienced trader getting your start in the midst of a bull market, it’s easy to overestimate your own skills as a trader as well as the importance of performing regular technical analysis.

This is a confirmation bias created from the fact that, as you start trading in a strong, growing economy, you’re likely to put your money into currency pairs that deliver profits over time. But no bull market lasts forever—and when the market starts to turn, those early successes could soon lead to losses that blindside traders and send them into a panic.

Fortunately, there’s an easy way to avoid this scenario—and it all starts with using ongoing analysis to monitor for changing economic conditions. As you develop your ability to read chart patterns and perform technical analysis, you can equip yourself with the skills needed to spot early signs of potential shifts in the overall market.

By identifying these red flags, you can close out parts of your currency positions to claim profits and reduce your exposure to potential losses.

Turning a Profit in a Bull Market

Ready to seize upon the optimism of a bull market? Here are some tips to help you capitalize on this opportunity:

  • Take long positions to capitalize on bull trends. When markets are strong and optimism is high, long-term growth is likely to follow. Traders can extend their trading time frames based on this overall stability. 

  • Use technical indicators to measure momentum. No bull market lasts forever, but momentum indicators can help you determine how long a price move is expected to last. This can help you set a trading time frame and pick the right moment to exit your position, preserving your profits.

  • Use contracts for difference (CFDs) to maximize your earning potential. During a period of economic growth, CFDs help you leverage your capital to the greatest degree of profit.

Bull markets can uplift economic confidence among consumers, but they aren’t the only type of situation in which traders can find profits. Even when bull markets take a turn for the worse, experienced traders can shift their priorities accordingly.

Finding Forex Opportunities in a Bear Market

Although a bear market reflects downward economic momentum for a country—and sometimes even the global economy—there are still trading tools you can use to capitalize on trading opportunities:

  • Lean on pairs featuring safe-haven currencies such as the U.S. dollar, euro, and yen. These currencies are likely to be more stable and can be paired with currencies from bear markets to help traders take advantage of market volatility.
  • Maintain positions for short time frames ranging from a few minutes to a day.

  • Due to the market conditions, long positions aren’t likely to offer as much value.
  • Trade the “rise” in downward price movements. This is the pullback during a larger price decline that can be used to claim a quick profit.

  • Use stop-losses to minimize your risk. The market may be in decline, but you can protect yourself by exiting a position at the first sign of a loss.

The volatility created by bear markets can be harnessed for trading success if you take steps to mitigate your exposure while also paying close attention to trading activity for select currency pairs.

Trading the US30, US100, and US500 Indexes

Bear and bull market trends are always reflected in the three major U.S. stock indexes. Because the global market and the U.S. market are so closely related, a global bull or bear market will likely be reflected in these U.S. indexes—and the indexes themselves are great tools for trading on the relative strength of the U.S. economy.

Capitalize on bear and bull markets by using these strategies when trading the US30, US100, and US500:

Go long in bull markets and short in bear markets. 

Periods of economic recovery and growth—especially after a downturn—can create significant profit opportunities if you’re willing to invest time by holding a long position in a bull market. In bear markets, meanwhile, you’re better off sticking to short selling to profit off index value declines or trading within shorter time frames that let you target pullbacks in these indexes.

Use jobs reports and other government reports to capitalize on market reactions. 

Pay attention to forecasts for these reports and use stop-loss trading to open positions in anticipation of instant reactions to economic news. During a period of volatility, these reports can generate a fast price movement that can give traders a tidy profit within an hour or less.

Tips for Successful Forex Hedging

When you’re worried about potential economic events or trends affecting your open positions, hedging is an effective strategy to mitigate risk while maintaining your current positions. 

Forex hedges can be leveraged in a few different ways. Although the approaches to hedging can be complex, here are three basic tips to help you understand your hedging options:

Create a basic hedge to insulate yourself against losses. 

In this scenario, you would open a short or long position opposite a forex position already held. Rather than closing out your current position, this hedge—which can be equivalent to your original position or a smaller amount to reduce your exposure—will give you stability and insulation as you monitor events and their impact on your forex account.

Use a complex hedge to create a counterbalance that guards against risk. 

While complex hedges can be difficult to design and could potentially increase your risk by establishing two separate positions liable to suffer losses, a complex hedge balances an existing position by betting on the rise or fall of another related position. If you identify geopolitical events that may cause volatility between Eastern and Western currencies, for example, you may decide to create a complex hedge that balances an existing GBP/USD position by opening a JPY/USD position—in the hopes that if GBP’s value falls, it will be balanced out by a rise in JPY.

Time your hedges carefully to minimize risk while maximizing profit potential. 

Hedging can be a great tool to protect yourself when bull or bear markets start to turn the other direction, but holding these positions for too long can unnecessarily cost you potential profits or compound your risk and losses if your complex hedge fails to pan out. Use stop-losses and close monitoring of economic events to make sure your hedge supports your trading goals.

Prepare Yourself for Any Situation

Successful trading doesn’t depend on perfect market conditions. It depends on traders using the right tools and researching opportunities based on what suits their preferred trading style.

Test these strategies for yourself—open a demo account today.

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The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.