“Investors have been bullish on this stock.”
“The pattern anticipates a bear market.”
“Anybody can make money in a bull market.”
Every investor uses these terms at some point. No matter what you trade, you’re going to hear these in every description. Even today, people use them for topics with nothing to do with money.
What do these terms mean in finance?
- Bullish VS Bearish
- How To Make Money In A Bull Market
- How To Profit In the Bear Market
- The Bottom Line
Bullish VS Bearish
People often use these to express their confidence in a certain scenario. If I’m bullish on a stock, I believe it’s value will increase, so I will look at it closely. Being bearish implies prices may go down, and one should make decisions with caution. They both work like opposites expressing a degree of confidence.
When it comes to investing, not everything is binary. Switching from bull to bear markets doesn’t mean to stop trading, but changing one’s strategy.
One could say that markets are always growing in the long term despite the temporary swings. But these periods are composed of smaller trends. Whenever the general market rises or falls by 20% or more, one can anticipate bull and bear markets. Otherwise, it’s a neutral market, which may offer more benefits for day traders than for buy-and-hold investors.
- The average bull market lasts three to four years. Bears last around a year, with far different results (some may take more than a year, and others less than two months).
- Bear markets cause prices to plummet 35% on average, while bull markets raise it over 100%.
Given the numbers, it’s not surprising that the overall view is always positive. Since bear markets are the minority trend, they can become one of the best investing opportunities.
Both have their differences. But what makes them alike is the delusion factor: people are always either overestimating or underestimating a stock. Neutral markets are rare, and if you could somehow see the real market value, you could predict it and use these market trends in your favor.
Here’s the mass psychology behind every bull market:
- Caution. Investors find the signs of a bull market, and prices have started to increase quickly. Since it breaks the previous pattern, most will choose to stay away, thinking it’s only a spike.
- Optimism. As stocks continue to climb, it’s “evident” it will keep going in that direction. It looks like a safe bet to buy a rising stock.
- Greed. Prices never stopped growing, and one doesn’t stop wondering how far it will go. If logic doesn’t overcome the emotion, one may keep buying because others are doing it, whether it’s valuable or not.
- Correction. Once numbers are ridiculously high, big traders may take advantage and sell, starting a negative trend. While it fluctuates in the short-term, investors fall into the “Bull Trap” and keep holding their positions while prices begin to drop.
People react to bear markets similarly:
- Recognition, or the lack of it: The first time prices fall, very few people take it as a bear sign. Market values change all the time: bears are simply unlikely to happen. If you could anticipate it so early, it would be an excellent shorting position.
- Panic: Prices continue to drop, and people feel confused. Could they have just lost the opportunity to sell while it was “high?” Is it as high as it will get? Should you sell before it gets worse?
- Stabilization: After watching numbers decrease for months, one starts to believe it will stay there forever, if not keep falling. In this curious stage, stocks don’t really keep falling, but people are too “shocked” to buy.
- Anticipation: Stocks start to recover, but only a few people are paying attention. Those who sold on the panic stage will have likely forgotten about the stock or look for other opportunities. The best investors actually prepare for future growth, because you can’t lose money if you don’t sell.
The most critical phases of these trends happen fast, so people don’t understand what’s going on. But when arriving prepared, you can always profit, whether it’s bullish or bearish.
Also, take a look at the guide to securities fraud.
How To Make Money In A Bull Market
We don’t think anybody will have problems making money at this period. But we do believe it’s an opportunity to prepare for winter. The better you plan your growth at this stage, the more money you’ll make later on a bear market.
Stay calm, patient, and rational.
It’s easy to feel excited in the market when everything is going up. But when prices get beyond what’s reasonable, it won’t be long until they fall. Whether that’s true or not, you should avoid the following mentality:
“I put money, stocks grew, and I made profits. I should have spent more.”
“Stocks plummeted, and I lost my investment. Why did I even think it was a good idea?”
Although you want to be right more than you’ll be wrong, you’ll still be wrong sometimes. It matters more to respect your risk tolerance rather than chasing the next big reward.
Do not sell everything you own.
The biggest opportunity cost is not staying in business. Even if you just sell for a moment, you could miss the opportunity of a lifetime.
People take very extreme perspectives: you either buy as much as you can or sell 100% of your stock. But when markets do well, you can sell 75% instead and leave the rest. Who knows? It could either be a bull trap or the next market paradigm. Only risk what you’re comfortable losing.
Buy more than you sell.
With so much volatility, it’s very attractive the idea of beating the market and making a fortune overnight. It does happen all the time; the problem is, millions fail where only a handful succeed.
Do you know what makes billionaires so wealthy? They stayed in the market from the beginning. Many of them haven’t ever sold more than a tiny portion. You can take the same approach as you do with your savings account. Add funds every once in a while and trust the process. It will be worth more in the future, regardless of the noise.
Only invest what you’re comfortable losing.
Yes, if you do everything right and take enough risk, investing can change your financial life forever. But knowing about investing has nothing to do with being an investor. When you have thousands of dollars in the market, it becomes inevitable to second guess yourself.
As you put more money on the table, mental pressure increases. Different voices in your head start to pull on different directions, and emotions eventually dominate. If you start small with something you can afford to lose, you’ll have more chances to make the right decision.
Additionally, make sure you don’t (with intent or not) find yourself in one of the pump and dump schemes.
How To Profit In the Bear Market
If you did everything well in the last bull market, the next bearish trend should be easier for you. In fact, most successful investors have made their fortunes during these stages. Here’s how to profit before a new bull market starts.
Focus on buying.
There aren’t really many people buying in bear markets, which is why you shouldn’t sell. If you didn’t come prepared, the best you can do is hold your assets until better times come and buy what you can.
When stocks fall with this trend, you can do discount shopping and expand your portfolio. If you’re already buying in the moment of maximum despair, the price can’t possibly go down. You have almost nothing to lose.
Get enough purchasing power.
You won’t be able to get those deals if you don’t bring enough supplies of cash. When making profits on bull markets, put some money aside for the bears.
No matter what trend you find yourself right now, you will need emergency savings. Besides, this safety net will help you feel calmer when everyone is panicking, thus making smart investment choices.
Pursue value rather than low prices.
During bull markets, you can buy any stock, and it will likely go up. In bear markets, most of them go back up as well after the trend passes, but it’s not an absolute rule. Some stocks do fall and stay there indefinitely.
Avoid using bear and bull markets as a justification for market prices: both terms are delusional. Whenever it rises or plummets, ask: What caused this stock to change? The answer is actual value contrasted with perceived value.
If the public has overvalued a company and prices fall, that doesn’t mean you should buy. Likewise, if you recognize the worth of a highly-priced stock, it makes sense to buy high and sell even higher.
Don’t make decisions solely on price.
Understand what risks and rewards you can handle.
Don’t let the fear of missing out get in the way of smart decisions. If you regret not putting more money before, you should equally accept the chance of spending more and losing it all.
And please, understand that having already lost doesn’t mean you should take more risks. If you believe you should be more aggressive, make sure you’re not falling in the loss aversion bias. Sorry, losing doesn’t increase your chances of winning.
If you anticipate the bear run, you can make money when markets go down. You “sell” it for the price you borrowed the stock, then return it, hopefully buying for less.
The reason you find this advice at the end is, it’s mostly for advanced investors who know about timing. Shorting stocks has inherent risks:
- You don’t control how long you’ll keep the stock.
- You have to cover more fees than with standard trading.
- You have to have enough money to cover possible losses. In theory, your upside is limited, but your downside isn’t.
If you’re still confident and know how to sort these obstacles, shorting may be for you. As in the bull market where you are careful and alert of any possible pump and dump schemes, so you should be attentive in the bear market and it’s corresponding short and distort schemes.
The Bottom Line
You can only win as much as you can risk. You can take more risks if you’re trained to do so. But you must accept that things will sometimes go wrong regardless of a perfect strategy.
Markets always go up over time, so you should always hold an amount as long as your patience allows. Bear markets can be devastating, and the only way to make them good is by preparing on bull markets.
Bullish or bearish? No matter which one you choose, you’ll always find an opportunity.