Given the dual nature of the binary options market, it makes sense to have a broader understanding of the general trends that are in place so that we can make the most informed trading decisions and increase our chances of creating profitable trades. When looking at the dominant trends that are in places in the markets, it tends to be a good idea to trade along with the momentum: When most asset prices are rising, CALL options tend to be a better choice. When most asset prices are falling, PUT options tend to be a better choice.
To describe which dominant trend is in place, the trading community will usually use term like Bull Market or Bear Market but it is much less common to see a discussion which characteristics actually make up these economic environments. Here, we will look at the differences between Bull and Bear Markets so that traders can more easily identify the dominant trend in a market and to place binary options trades accordingly.
Characteristics of Bull Trading Markets
Bull Markets are typically characterized by a financial environment that is composed of a large number of assets that are increasing in value, or are expected to increase in value. In many cases, the term refers to the stock markets but for those in the trading community, the term is applicable for all asset types. Bull Markets are created by generally optimistic sentiment, rising consumer confidence and the wider expectation that companies will successfully generate profits.
One clear indication of the existence of a Bull Market can be seen in the price of commodities, in the changes in valuation of a national currency, and in the overall performance of the major stock indices. When looking at price activity in all of these various asset classes, it becomes clear that price swings show higher highs and higher lows (the definition of an uptrend). When all of these factors are seen in combination with one another, a Bull Market is in place and CALL options will generally be viewed as favorable when entering into trades.
Psychology and news headlines in the financial media are also instrumental in these cases, as positive momentum tends to be contagious. When market valuations become excessive, and out of line with the price that is truly appropriate, market “bubbles” can be seen, and this is when it becomes prudent to start playing the other direction.
Characteristics of Bear Trading Markets
On the flip side of this is the Bear Market, which is typically characterized by a financial environment what a majority of trading assets are decreasing in value, or are expected to decrease in value. Again, this term can be applied to all asset classes and Bear Markets are typically created by pessimistic sentiment, declining consumer confidence and the general expectation that companies will perform weakly in terms of profit generation.
Indications of a Bear Market can be seen all major asset classes (commodities, currencies and stock indices) when it becomes clear that price swings show lower highs and lower lows in a broad sense (which is the definition of a downtrend). The combination of these occurrences create Bear Markets and in these cases, traders tend to prefer PUT options when entering into trades.
Some definitions of a Bear Market suggest that declines of at least 20% must be seen in the major asset classes in order to confirm that a true Bear Market is in place, and a recent example of this could be seen in the outcome of the 2008 Credit Crisis, which had a substantially negative effect on trading markets.
Understand the Momentum of the Markets
Given the dual nature of the binary options market, it is imperative for all traders to understand the overall price momentum that is seen in a broad sense before any real trades are placed. Going against the broader market momentum can easily result in trading losses, so it is important to have an understanding of what the majority of investors are thinking at any given time. This can enable you to trade alongside the driving momentum of the market and to create trading setups that have a high probability for success.