The stock market can seem like a game of chance sometimes \u2014 you might wake up one day to find that your investments have grown by 5% overnight, then six months down the line, there was an unexpected crash, and you\u2019ve lost all your gains (and then some).<\/p>\n\n\n\n
But what if I told you that this so-called \u201crandomness\u201d is actually a well-studied lifecycle that we can predict and account for in our trading decisions?<\/p>\n\n\n\n
If you\u2019ve been around for long enough, you can\u2019t have failed to notice that the economy goes through booms and busts, and these are known as bull markets and bear markets for our investments<\/a>.<\/p>\n\n\n\n The two names might sound similar, but trust me, the two phenomena are worlds apart. Let\u2019s take a look at what bear and bull markets are, what to expect from them, and how to react to them for maximum profit.<\/p>\n\n\n\n If I had to sum up the sentiment of a bull market in five words, it would be these: let the good times roll. During a bull market, everything looks peachy \u2014 the economy is doing great, stock prices are high, and unemployment is low. What more could you ask for?<\/p>\n\n\n\n Technically, a bull market is defined as a time when prices rise \u2014 generally by 20% or more<\/a>. This trend then continues over time, with prices sustaining their highs or continuing to increase; this encourages more investors to join in and start buying, fueling a virtuous cycle of continual price rises.<\/p>\n\n\n\n It\u2019s a time when investors see their investments skyrocket in value and can find the most opportunities for profit-making since everything is booming. Sounds amazing, right?<\/p>\n\n\n\n Unfortunately, the good times can\u2019t last forever. On average, bull markets last between\u00a0four to 11 years<\/a>, although they can be over as quickly as a few months.<\/p>\n\n\n\n When you hear bull markets discussed, chances are that it\u2019s referring to stock market indices (namely the S&P 500, NASDAQ, or Dow Jones Industrial Average). However, bull markets can occur in markets for all kinds of investments. Here are the main types:<\/p>\n\n\n\n Another recent development is cryptocurrency bull markets, but because we\u2019re still in the early days for this one, more research needs to be done to understand them better.<\/p>\n\n\n\n However, it\u2019s recently become clear that bull markets (and bear markets) are very much a real phenomena in the world of crypto \u2014 just look at how many peaks and crashes Bitcoin has had so far.<\/p>\n\n\n\n As they say, what goes up must come down \u2014 and that downward movement is encapsulated in bear markets.<\/p>\n\n\n\n The mechanisms here are very similar to those found in a bull market, except for everything happens in reverse: prices decline, so more investors sell, resulting in prices to continually decline. As a result, you can expect slow growth and high unemployment in addition to declining prices.<\/p>\n\n\n\n This might all sound like a disaster for investors, but that isn\u2019t necessarily true \u2014 because just like bull markets, bear markets can\u2019t last forever, meaning they offer a unique opportunity to make money.<\/p>\n\n\n\n Just like bull markets, bear markets can happen for all kinds of investments and asset types.<\/p>\n\n\n\n Bull markets and bear markets shouldn\u2019t be looked at in isolation \u2014 they both form part of the economic cycle. During the economy\u2019s expansion, the bull market is in full swing; then, after it reaches its peak, it creeps into a bear market.<\/p>\n\n\n\n As we\u2019ve discussed already, bull and bear markets can refer to any kinds of investments, assets, or commodities \u2014 so at any given moment, there may be a bull market for cryptocurrencies yet a bear market for stocks.<\/p>\n\n\n\n It\u2019s also possible for there to be neither a bear market or a bull market \u2014 sometimes, the market is simply in flux.<\/p>\n\n\n\n At this point, the curious among you might be wondering exactly why these two types of markets attracted the names they did. Etymologists believe<\/a> the concept of a bear market came from the proverb that it\u2019s unwise \u201cto sell the bear’s skin before one has caught the bear.\u201d The bearskin came to represent stocks and linked to the idea that speculators sold stock believing that the price would go down.<\/p>\n\n\n\n The imagery of the bull is slightly less concrete, but it was likely chosen to represent the idea of those running to make stock market purchases when prices rise, much like a bull hurtling toward a red flag.<\/p>\n\n\n\n Since the eighteenth century, these visualizations have stuck with us.<\/p>\n\n\n\n You don\u2019t have to go too far back in time to find some solid examples of bull markets and bear markets.<\/p>\n\n\n\n Prior to the COVID-19 pandemic, we were in the midst of the longest bull market in history<\/a>, which lasted from March 2009 right to March 2020. Over this time, the S&P 500 grew by more than 400% \u2014 anybody who had the guts to invest back in 2009 could have made themselves very rich by now.<\/p>\n\n\n\n Unfortunately (depending on who you ask), that means a bear market is coming at some point \u2014 although nobody can say exactly when it will arrive.<\/p>\n\n\n\n The previous record for the longest bull market happened between\u00a0October 1990 and March 2000<\/a>.<\/p>\n\n\n\n As for the declines, the best example is the Great Depression. Between 1928 to 1932, the Dow Jones Index fell by around 80%<\/a>. It also decreased for four consecutive years, making it a more sustained decline than any other bear market.<\/p>\n\n\n\n These are both examples of extended bull markets and bear markets, but we can also see the same trends happening in micro. In March 2020, the long bull market we\u2019d been enjoying suddenly ended due to the pandemic \u2014 and when I say sudden, I mean sudden. The crash from a high to its all-time low on March 23 2020 happened in just 33 days, making it the fastest peak to trough transition on record<\/a>.<\/p>\n\n\n\n Yet almost as quickly, it recovered, reaching its previous high just under five months later. This speedy recovery was likely because investors had confidence that governments were taking the necessary steps to protect their economies from the effects of the pandemic and that the market would therefore be able to rebound quickly.<\/p>\n\n\n\n No matter how well you know the theory, it\u2019s useless if you can\u2019t apply it to improving your investment decisions and becoming a more profitable trader.<\/p>\n\n\n\n One thing you should have picked up on by now is that you can\u2019t have a bull market without a bear market, and vice versa \u2014 the two are complementary and natural, so there\u2019s no need to be afraid of the lows. Eventually, chances are that your investments will regain their lost value.<\/p>\n\n\n\n However, the correct way to react depends on a few factors. Most importantly, how\u2019s your risk tolerance? If you can\u2019t stomach seeing your investments plummet in value for a while, trying to predict and profit from price movements probably isn\u2019t for you.<\/p>\n\n\n\n You should also consider the time horizon you\u2019re investing over \u2014 are you trying to make some quick gains in the short run, or are you more focused on maximizing your profits a few decades down the line?<\/p>\n\n\n\nWhat Is a Bull Market?<\/h2>\n\n\n\n
Types of Bull Markets<\/h3>\n\n\n\n
What Is a Bear Market?<\/h2>\n\n\n\n
Understanding Bull Markets and Bear Markets<\/h2>\n\n\n\n
Real-Life Examples<\/h2>\n\n\n\n
How Should You React to Bull Markets and Bear Markets?<\/h2>\n\n\n\n