In the vocabulary of financial markets, the two terms “bull market” and “bear market” are used to describe the market's overall condition and the direction prices are moving. The origin of these terms comes from how these two animals attack: a bull swings its horns from low to high when it charges (rising prices), while a bear strikes downward with its claws from high to low (falling prices).
What is a bull market?
A bull market refers to a period when asset prices have a sustained, continuous upward trend; by a general standard, once a market's price has risen at least 20% from its previous low and that rise continues, we've entered a bull market. In this market, the dominant emotions are intense optimism and fear of missing out on gains; demand is far greater than supply, and investors see every short-term correction as a buying opportunity; economic conditions are usually accompanied by growing production and falling unemployment; and bad economic news becomes ineffective, while positive news triggers big price jumps.
What is a bear market?
A bear market refers to a period when prices have a sustained, grinding downward trend; usually, a drop of 20% or more from price highs confirms entry into a bear market. The dominant emotions are fear, pessimism, and, eventually, complete capitulation; supply is far greater than demand, and traders see the smallest price rise as an opportunity to exit; economic conditions are usually accompanied by a recession and rising interest rates; and positive news loses its ability to lift prices, while negative news immediately triggers fresh waves of selling.
Bull markets are usually longer, and their growth happens gradually, step by step; bear markets are usually shorter but happen much faster and more painfully — meaning price comes down by elevator but goes up by stairs. In a bull market, money pours from safe assets toward risky assets; in a bear market, money exits risky assets and flees toward the dollar, gold, and bonds. The best strategy in a bull market is holding your assets and riding the trend; trading against the trend in a bull market is very dangerous.
The emotional cycle of traders
The trader emotional cycle is a reflection of human nature. Financial markets are run by humans, so price behavior is nothing but the expression of two fundamental feelings: “greed” and “fear.” This cycle usually starts from an uptrend: first the optimism and hope phase, when prices start rising gently; then the thrill and belief phase, when the pace of the price rise picks up; and then the extreme euphoria phase, where the biggest dangers lie hidden and people with no knowledge at all pile into the market, everyone thinking the price will rise infinitely. Then the denial phase begins, when the price starts to fall but traders call it a short-term correction; the decline intensifies and severe fear and panic selling begins; prices hit bottom and retail traders sell at heavy losses, with complete despair taking hold of the public; and finally, the depression and rebuilding phase, where the market goes quiet and patient, smart investors, without any news fanfare, start accumulating assets at bargain prices, and the cycle begins all over again.
Professional traders operate on Warren Buffett's famous principle: “Be fearful when others are greedy, and be greedy when others are fearful.” A sell signal comes when the general media is talking about an asset's astronomical rise and the fear-and-greed index shows a reading above 80; a buy signal comes when the news is all about collapse and the fear-and-greed index has crashed below 15. Watching social media and comparing the price chart against trading volume can also help; if price reaches a new high but buying volume is declining, it shows professionals are selling to excited retail traders. Overcoming your own emotions and moving against the direction of the crowd's excitement is the hardest thing to do in financial markets, but it's exactly the point where big, real profits are made.