Bull vs. Bear Markets – What Is the Difference?

By Walker England | November 21, 2019

Understanding the difference between bull and bear market environments could help guide traders in differing stock market conditions. Having a plan of action for both market types could ultimately lead to finding better trading opportunities, while eliminating emotional reactions.

The terms bullish and bearish are often used in trading circles, and at the most basic level can be used to describe if an underlying market is going up or down. Typically, these terms are applied to the stock market but the truth is any asset can be classified as bullish or bearish if the conditions are right! This includes, stocks, real estate, commodity markets and more. Today, we will be comparing the defining characteristics of a bull vs bear market to help gain a sense of what exactly these terms mean for traders.

The Difference Between Bull vs. Bear Markets

In a bear market, the market is going up. That means a lot of green candles on a trading chart moving higher and higher over time.

In a bull market the market is going down. That means a lot of red candles on a trading chart moving lower and lower over time.

Keep reading for more details and examples on how Bull and Bear markets differ.

What do Bull Markets Look Like?

Bull markets are categorically known for their rising prices. These prices may continue to rise as long as there are active buyers willing to pay more for the underlying traded security. Below, we can see an active bull market on the QQQ, a weighted exchange traded fund (ETF) of the NASDAQ-100. As it stands, prices have risen more than 650% from their 2009 lows. As of the date of this article, this bull market is still running with the QQQ now trading just below a newly printed multi decade high.

Even though the prices in our example are overwhelmingly trading upward, traders should note that there can and will be pullbacks in prices even in the strongest of bull markets. These pullbacks are often seen as opportunities for traders to rejoin the prevailing trend. As more traders buy, prices may surge even higher!

Stock chart of QQQ showing the 2009 - 2019 bull market

What Defines a Bull Market?

A bull market is not only a rising market, but it is often an emotional market. Typically, this means that the average trader is buying out of sheer euphoria without any concern for risk management. Greed also plays a factor in bull markets. As prices rally even further, new traders may begin to fear missing out on the move. The surge in Bitcoin (2010-2017), Tech Stocks (1995-2000,) and Silver (2009-2011) have all met the criterion of:

  • Consistent Rising Prices
  • General Exuberance or Euphoria
  • Fear of Missing Out

When do Bull Markets End?

The saying, all good things must come to and end, also applies to bull markets. Eventually, after prices have risen to such an extreme, gravity seemingly takes its affect. The bull market rallies mentioned previously on Bitcoin, Tech Stocks and Silver were all ended by prompt and sometimes violent reversals. Normally, this decline happens for a variety of fundamental reasons. In most markets, fundamental data that was once optimistic begins to sour; some examples are a bad earnings report, missed employment data or even a glut in a commodities market. At the end of the day, whatever the catalyst, when the exuberant buy it all euphoria ends so does the bull market. Depending on how aggressively prices sell off, new lower lows could signal the beginning of a new bear market.

What do Bear Markets Look Like?

If bull markets are marked by rising prices, bear markets are decidedly displayed on the graphs by large moves to lower prices. One of the most recent examples of a bear market is the 2006-2009 crash in the XHB home builder’s ETF (see graph below). During this period , XHB tumbled as much as 85% in 3 years! As the market continued to drop, most investors were fearful of losing their hard-earned profits. This panic caused atypical selling, driving prices even lower!

While selloffs can happen quickly, it is rarely seen that an asset drops instantaneously to zero. This stair stepping to a lower price could allow the savvy, educated trader to place well timed sell orders as prices continue to descend. A few key factors to consider when trading bear markets are to remain calm, don’t panic and always use protective risk management techniques!

Stock chart of XHB showing the 2006 - 2009 bear market

What defines a bear market?

A bear market should be seen as the antithesis of a bull market. If the consensus is euphoric buying in bull markets, bear markets are typically defined by panic selling. These emotions are often sensationalized by T.V. personalities that simply fan the flames of decline. Traders wary of losing their years of hard-earned profits may begin to sell out of fear of greater losses. A bear market generally consists of:

  • Consistent Falling Prices
  • General Panic
  • Fear of Losses

When do Bear Markets End?

How far can prices drop? This is a common question, especially if an investor finds themselves on the wrong end of a losing long position. The truth is, prices could continue to fall until markets normalize and selling pressures subside. Typically, buyers will return to a devalued asset when markets are technically undervalued. This bullish turn can also occur when fundamental data cues begin to trend upward. If a trader is aware of what they are looking for, the end of cyclical bear markets could provide excellent buying opportunities.

A Trader's Perspective

After experiencing a few market cycles, most traders will realize that markets may go up and down for a variety of reasons. A key to trading these patterns is to eliminate emotional decisions regardless of an asset’s direction and to stick with a well thought out trading plan. Ultimately, this should help eliminate one of the most seen novice mistakes of buying high and selling low.

Take the first step to learning skills that could help you navigate the financial markets. Register for a free class today.

Now that you understand the differences between a Bull and Bear market, here are some things to keep in mind:

  • Bull Markets are More Than Rising Prices
  • Bearish Markets Could Also Provide Ample Trading Opportunities
  • Don’t Panic, Have a Plan and Trade It

About the Author
Walker England

Walker England became an active trader just prior to the dot-com bust. This early experience in risk management taught him valuable lessons he shares with his students as an Online Trading Academy Instructor.

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions.

The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Past results are not a guaranty of future performance.

Free Class