Whether you are a beginner trader investing on the market for the first time, or an experienced investor looking for your next move, something that you will hear often is the term “bull market”.
To the uninitiated, you may wonder what trading has to do with an animal, as with the contrary term “bear market”, but all will become clear, as we will now explain.
When talking about a market being a bull market or bear market, what we are actually doing is describing the fighting stance of both of those animals, as a metaphor for how the market is currently performing.
In the wild, a bull thrusts its horns upwards when charging towards its opponent, whereas a bear attacks its prey by swiping its paws in a downward motion. Therefore, when the market moves upwards it is a bull market, and when it is going in the opposite direction it is a bear market.
What is a Bull Market?
Financially speaking, a bull market can be defined as an extended period in which the price of an asset or security is on a continuous rise, while the commonly accepted definition is generally when stock prices rise by 20% after two declines of 20%.
Bull markets tend to last for months, or even years in some cases. The term mainly refers to the stock market, despite also being applied to anything that can be traded, such as bonds, currencies, commodities, and cryptocurrencies.
They usually occur during periods consisting of favourable economic conditions, in which there is a sustained increase in prices, with investor sentiment geared towards faith in a long-term market uptrend.
Such an upbeat economic picture is typically characterised by a strong economy in terms of GDP, as well as high employment levels and a generally positive demand for stocks, in line with the overall tone of the market.
How to Capitalise on a Bull Market
To profit the most from a bull market, i.e., when stocks are on the rise, an investor must be ready and able to take advantage of the numerous opportunities that present themselves.
The key to success is to employ strategies suitable to the specific market conditions, which requires traits such as consistency, discipline, focus, and a propensity to capitalise on fear and greed.
Below are some of the best ways to gain from a situation whereby security prices increase faster than the overall average rate.
Go Long
Investing for long-term success is a good starting strategy in a bull market environment. A long position, also referred to as a buy and hold strategy or bull position, is exactly as its name suggests - buying a specific security and retaining it, rather than selling quickly.
When prices rise, such a position can become increasingly profitable in a long-term continuous uptrend. In this scenario, an investor will stick with a stock even if there is a short-term price fall, as they feel comfortable remaining invested for the long-term.
Call Options
Another way to make the most out of a bull market is to purchase a call option, which is a contract giving owners the right to buy a specified amount of an underlying security at a particular price until a specified date (the expiration date).
Call options tend to go up in value as the underlying stock’s price increases. In the case where the stock price surpasses the option’s strike price, the buyer can generate a profit by purchasing the stock at the lower strike price before selling it for a higher price on the open market.
How to Identify a Bull Market
The global markets trade in cycles, meaning that they will feature uptrends and downtrends, with investors experiencing bull and bear markets over the course of their trading lives.
For those looking to identify a bull market ahead of time, it can be a thankless task. However, there is one method that can be used as a potential identifying technique, in the form of a technical indicator called the advance/decline (A/D) line.
The A/D line is primarily used to show market sentiment, which calculates the number of advancing issues divided by the number of declining issues over a set period. If the number is greater than 1, it is deemed to be bullish, while if it is below 1, it is considered bearish.
It is a cumulative indicator that tells traders whether the majority of stocks in a market are rising or falling. This method is frequently used to confirm price trends in major indexes, as it can signal price reversals when divergence occurs.
Concluding Remarks
Ultimately, the exact way that you choose to invest in a bull market will depend on your trading goals and specific time horizon.
Of the most important things to remember is ensuring that you adopt consistency at every stage of your trading journey, in terms of evaluating your investments - regardless of whether it is a bull market or bear market.
As a beginner investor, the buy and hold position is a recommended course of action with regards to trading strategy. The key here is time and patience, and not panicking in the short-term, as well as keeping in mind the potential long-term gains.
