Binary options traders hear the words ‘bullish’ and ‘bearish’ being bandied around all the time in conversations about the stock market, but not every trader knows the meaning and history behind these market condition analyses. These general market conditions do have an impact on every position that a trader takes, so let’s delve a little deeper into the nature of bull and bear markets.
History of Bears and Bulls
Both of these terms are heavily associated with stock markets, and it is believed that they were derived from the method by which each animal attacks its prey. A bear swipes down with its claws, which became a metaphor for a market whose prices are moving uniformly downward as the result of sell-happy investors; and a bull thrusts upwards with its horns, symbolizing a market with upward price mobility that is spurred by investors who buy, buy, buy.
Conditions for Bear Markets
Negativity and pessimism are the dominant emotions present in bear markets. These market conditions reign when asset prices decline steeply and investors choose not to purchase assets for fear of further downward price mobility. These bear markets often lead to economic downturns and a greater prevalence of unemployment and market losses. Over the short term, a trader may notice bearish conditions following the release of negative financial reports or economic data.
Conditions for Bull Markets
Conversely, investors in bull markets are optimistic about future earnings and are more likely to make trades because they feel that their asset purchases will pay dividends in the future. Bull markets occur when the economy is humming, businesses are booming, and unemployment figures are low. Having said that, it is important to remember that certain assets can be bullish for a shorter period of time as well.
The bull/bear line is a measure of investor confidence that takes the form of a moving average of the last 250 investor trading days. This line provides a reference value for mid-to-long term trades, and helps investors determine when the market’s mood may be shifting. If an index drops below the line, many investors believe that the market will shift from bearish to bullish, and if an index rises above the line, the opposite shift is believed to occur. Not all investors agree on the validity of the bull/bear line.
The Charles Dow Concept
Charles Dow, the legendary editor of the Wall Street Journal, is one of those skeptical investors. Dow believed that bear and bull markets were brought about by human emotions and actions only. Traders have the power to impact markets themselves, so rather than getting caught up in what may or may not occur in upward or downward trending markets, they should concentrate on the fact that their actions dictate the market’s movement.
Bear and bull markets are frequently measured in terms of years, so these measurements are likely only moderately helpful for binary options traders who have many short-term trades on the table. Regardless of whether individual prices move up and down on particular days, market mood can linger for a long time. Options traders must take into consideration more short-term price indicators if they want to be successful in short-term trades.
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