What You Need to Know About Trading Markets
As one of a growing number of binary options traders, you will hear many terms being used during your daily trading activities. Two of the most popular terms are bullish and bearish. These are important indicators as to the direction of price movement in individual stocks, indexes or the market in general. The bulls and the bears have been around since the dawning of the markets themselves, and there is plenty of history about these types of market conditions. While they are vitally important to your overall trading activity, they do not always factor into every decision that you take. In order to understand precisely how these markets work, a deeper analysis of the bull and bear markets is required.
Understanding the Bulls and the Bears
Stock markets are the domain of the bulls and the bears, but so are other markets around the world. If you consider how both of these animals react in their natural state, you can get a better understanding of why each of these specific terms is used. When bulls charge, they stomp their feet and they thrust their horns up into the air. Hence the term bull market, because there is upward movement. A bear by contrast attacks by swiping its paws at its prey low and hard, bringing it down to the ground. Hence, a bear market is indicative of a market whose prices are moving in a downwards direction. The bulls are buyers since they are driving the market higher and the bears are sellers since they are dragging it lower.
What Conditions are Necessary for Bull Markets?
As a general rule, bull markets are filled with optimism. Traders and investors are optimistic about the future prospects of the tradable asset and are more likely to engage in higher volumes of trading overall. They do this because they have the belief that the assets they are purchasing will pay off handsomely in the future, by way of dividends, higher ROI and a stronger share price. A bull market is prevalent in a strong or resurgent economy, and the majority of economic data supports the market. Things like low unemployment rates, high consumer confidence, strong and steady PMI for manufacturing and service etc. Bull markets are not necessarily long-term phenomena – they can exist for a short period of time, for individual assets or asset categories.
What Conditions are Necessary for Bear Markets?
Bear markets are characterized by negativity and pessimism. When a bear market exists, traders and investors are more likely to sell than they are to buy. However a more important factor is the volume of overall trading in a bear market: it is much lower. Bear markets are characterized by declines in asset prices, an unwillingness to purchase assets, because there is a fear that prices will move sharply lower and general malaise in the economy. Economic conditions are typically equally negative in a bear market, with unemployment steadily rising, consumer sentiment declining, PPI, PMI, CPI and other data following a negative trend etc. Bear markets can be triggered by the release of negative economic data such as jobs growth, unemployment, GDP or even announcements from the Fed.
What is the Bull/Bear Line?
The financial markets are characterized by plenty of metrics, and one such measure is the Bull/Bear line. This measures the overall level of investor confidence in the form of an MA (moving average). This MA takes into consideration the previous 250 trading days. It is a reference point for medium to long-term trading activity and it will serve investors well to ascertain the way the market is likely to shift in the future. While this particular financial measure has not been empirically proven, it is used to gauge potential shifts in the market. For example if a particular index shifts below the Bull/Bear line, investors think the market will move from bullish to bearish, and vice versa.
What is the Charles Dow concept all about?
If you have heard about the Wall Street Journal, then you know who Charles Dow is – he was the editor of this top-ranking publication. He was highly skeptical of the markets, choosing to believe that markets were driven by the actions and emotional conduct of investors, particularly when it came to things like bull markets and bear markets. This is a popular view that is shared by many traders today, because it gives credence to the fact that pervasive sentiment leads to bull and bear markets. Anxiety and stress creates a situation where the bears dominate, while euphoria can lead to a bull market.
When it comes to binary options trading, the timeframe of individual trades is dramatically shortened. Bull and bear markets typically reference a sustained period of trading activity following a specific trend – months or even several years in duration. The impact of a bull market or a bear market on binary options trades is largely negated by the short-term nature of these trades. Market mood tends to stick around for a lengthy period of time, but short-term price indicators are equally important in determining your success rates in short-term trading cycle.
How to Profit Off Different Types of Market Movements?
Believe it or not there is profit that stands to be made in bullish and bearish markets. This seems counterintuitive, since many stock traders are of the opinion that only rising markets generate returns. However, nothing could be further from the truth. Trading the markets is based on probabilities; sentiment can go up or down and profits can be made by betting on trader sentiment. Such is the nature of binary options trading that you can place call options when you believe the price of an asset is going to rise at some future point in time, or a put option when you believe the price of the asset will fall at some future point in time. In other words, you can always make money in the market – even in a persistently bearish market.
With this in mind, you could adopt the bull approach which requires you to wait until the asset price has bottomed out before you buy in. That’s when you would go long on the asset by selecting a call option. Any asset that is fundamentally sound will always appreciate over time. This is how the stock market functions. Market corrections take place when a 10% decline in prices occurs, but strong assets will rebound regardless. After the China equities rout, trillions of dollars were wiped off the global markets, but strong assets will always recover over time. The Dow Jones Industrial Average is one such bourse that has shown incredible bullish sentiment since 2012. Major indices around the world typically grow by a set percentage annually. When an asset is undervalued, it presents the perfect opportunity for traders to come in and purchase that asset before the rebound.
Of course it will take time for asset prices to rise, and that is precisely why stock market investments are not for everyone. You could have your money tied up for years in the stock market, so you need to evaluate your long-term objectives, when you need the money to be accessible and your other financial commitments. As a short-term trader, you cannot have your money tied up in long-term assets – you would have no wiggle room and no capital to play with. Therefore short-term traders prefer binary options trading which requires an entirely different strategic approach. The bull approach is time-consuming, and may not be ideal for all traders at all times.
For the short-term, trading on action is the better approach. By this we mean you watch and wait for trends to be identified and then you seize the opportunities for short-term growth potential. For this approach, you would use the bull and the bear strategy, since you’re not restricted by any certain direction. This is precisely why binary options are preferred by so many traders with this particular strategy. If your trades are less than $100,000 per trade, you would likely find this method to your liking. Regardless, you are encouraged to wait for precisely the right moment to place your trade. If you notice for example that stocks are selling off and trading is slow, if even for a moment, that is your entry point. You buy in and go long on the stock. In other words you place a call option in expectation of a price rise. You must always have an expiry time in mind because markets can fluctuate wildly over time. When your money is tied up in a trade, you don’t have access to it so you want to realise profits as quickly as possible without exposing yourself to too much risk. In this vein, 60 second trades have become increasingly popular. This trading timeframe is not ideal for everyone, so you will want to ensure that you know all the details of the particular trade before your money gets tied up.
There are lots of things to look out for when you’re trading financial assets. Big stocks with loads of volume can be subject to big changes in a relatively short timeframe. Small cap stocks will typically see changes take place at a slow pace, because fewer traders are buying and selling them. This slows down the price mechanism. When you are determining your trading timeframe and executing trades you will always want to bear these factors in mind. There are also externalities to consider such as trading fees, commissions, account management fees and so forth. Fortunately when you trade binary options you are exempt from many of these fees, and you needn’t worry about the size of price movement – only the direction matters.