Introduction

Market trends are among the most fundamental aspects of financial markets. We can define a market trend as the general direction an asset or market is taking. Therefore, market trends are closely followed by technical analysts and fundamental analysts.

Bull markets tend to be relatively simple to trade because they allow some of the simplest trading and investing strategies to be implemented. Even inexperienced traders can achieve good results in truly favorable bull market conditions. That said, it is also essential to understand how markets move in cycles.

So what do you need to know about bull markets? How can traders profit from bull markets? Let’s take a look at the question together in this article!

What is a bull market?

A bull market (or bull run) is a state of a financial market where prices are rising. The term “bull market” is often used in the context of the stock market. However, it can be used in any financial market, including Forex, bonds, commodities, real estate and cryptocurrencies. Additionally, a bull market can also refer to a specific asset such as Bitcoin, Ethereum, or BNB. It can even refer to a sector, such as utility tokens, privacy coins or biotech stocks.

You may have heard Wall Street traders use the terms “bull” and “bear.” When a trader says they are bullish on a market, it means they expect prices to rise. When they are bearish, they expect prices to fall.

Being bullish can often mean they are also long this market, although this is not necessarily the case. Being bullish does not necessarily mean that a long position is open at this time, prices may rise or one may expect a rise.

It is also worth noting that a bull market does not mean that prices are not decreasing or fluctuating. This is why it makes more sense to consider bear markets over longer periods of time. In this sense, bull markets contain periods of decline or consolidation without breaking the major market trend. Take a look at the example below. Although there are periods of decline and some violent market crashes, it has seen a strong rise since its inception.

The Bitcoin price chart (2010 to 2020).

So, in this sense, the definition of a bull market depends on the time horizon considered. Typically, when we use the term bull market, we are talking about a period of months or years. However, as with any other market analysis tool, trend lines on higher time horizons tend to be more reliable than trend lines on lower time horizons.

Therefore, there may be prolonged periods of decline in a long-term bull market. These counter-trend price movements are notorious for being particularly volatile, although this can vary considerably.

Examples of Bull Markets

Some of the most well-known examples of bull markets come from the stock market. These are the periods when stock prices and stock indexes (such as the Nasdaq 100) are constantly increasing.

When it comes to the global economy, it oscillates between bull and bear markets. These economic cycles can last for years or even decades. Some say the bull market that began after the 2008 financial crisis and lasted until the coronavirus pandemic is "the longest bull market in history." This may or may not be true, as we said, long term bull markets can be a matter of perspective.

Let's take a look at the long-term performance of the Dow Jones Industrial Average (DJIA). We can see that it has essentially had a century-long bull market. Of course, periods of decline can last for years, such as those in 1929 or 2008, but the general trend is always upward.

DJIA performance since 1915.

Some argue that we could see a similar trend with Bitcoin. But we can't really say if and when Bitcoin will face a multi-year bear market. It's also worth noting that most other cryptocurrencies (i.e. altcoins) will likely never experience similar price appreciation, so you need to be extremely careful about what you invest in.

Bear market or bull market, what is the difference?

They are opposite concepts, so the difference is not particularly difficult to guess. Prices continually rise in a bull market, while prices continually fall in a bear market.

This also leads to differences in how best to trade them. In a bull market, traders and investors will generally want to go long. While in a bear market, they either want to go short or stay in cash.

In some cases, staying in cash (or stablecoins) may also mean shorting the market, as we expect prices to fall. The main difference is that maintaining liquidity is more about preserving capital, while short selling is about profiting from falling asset prices. But if you sell an asset only to buy it back at a lower price, you're essentially short, even if you don't directly benefit from the decline.

Another thing to consider is fees. Staying in stablecoins likely won't incur fees, as there are generally no custody costs. However, many short positions require a funding fee or interest rate to keep the position open. This is why quarterly futures contracts can be ideal for long-term short positions, as there are no associated financing fees.

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How can traders profit from bull markets?

The main idea behind trading bull markets is relatively simple. Prices are rising, so it's usually reasonable to go a step further and buy the dips. This is why the buy and hold strategy and dollar-cost averaging are generally well suited to long-term bull markets.

There's a saying that goes something like this: "The trend is your friend, until it's not." » When it comes to trading and investing, it is generally best to trade in the direction of the market trend. At the same time, no trend is forever and the same strategy may not perform well in other parts of a market cycle. The only certainty is that markets can and will change. As we have seen with the COVID-19 outbreak, multi-year bull markets can be erased in a matter of weeks.

Naturally, most investors will be seduced by a bull market. This makes sense since prices are rising, which is why overall sentiment should also be bullish. However, even in a bull market, some investors will be bearish. If their trading strategy is suitable, they can even be successful with short-term bearish trades, such as going short.

Therefore, some traders will try to short sell recent highs in a bull market. However, these are advanced strategies and are generally more suitable for professional traders. As a less experienced trader, it generally makes more sense to trade with the trend. Many investors get tricked into trying to short sell bull markets. After all, stepping in front of a raging bull or a locomotive can be dangerous.

To conclude

We discussed what a bull market is, how traders can protect themselves and profit from this situation. In general, the simplest trading strategy, regardless of the market trend, is to follow the direction of the overall trend.

Therefore, bear markets can present good trading opportunities even for beginners or novice investors. However, it is still essential to manage risks correctly and continue learning to avoid mistakes as much as possible.