The origin of the term bearish
The term ‘bearish’ or ‘bear’ is based on the metaphor of a bear, swiping downwards with its paws, thus pushing prices down.
The dynamics of bearish markets
The term ‘bearish’ is applicable to all the financial markets, among others, the forex market, stock markets, commodities markets, and options markets.
Simply put, a bearish or bear market is one that is in a downward trend, characterised by lower highs and lower lows.
Typically, a declining bear market has fallen 20% or more from its recent highs. Prices of currencies and securities, such as stocks, bonds, options, and futures are continuously declining, resulting in a downward trend that traders and investors believe will continue.
The term bearish means that a trader or investor is pessimistic about the downward market trend or falling prices of securities or currencies and that prices will move lower from their current positions.
The downward trend of a bear market is strengthened as investors sell riskier securities such as stocks and less-liquid currencies from emerging markets.
Typically, traders and investors withdraw their funds from a bearish market and wait for the opportune moment to re-enter the market.
However, a bear market can be risky to invest in as the prices of many equities lose value and become volatile.
Conversely, a bullish or bull market refers to a market that is in an upward trend, marked by higher highs and lower lows, and that the upward trend will continue. It is a market characterised by high confidence, optimism about profit-making opportunities, and low aversion for risk.
Bears and forex trading
Forex traders have the opportunity to trade in both bearish and bullish markets. The reason is that forex trading is always executed in currency pairs – a trader selling one currency and buying another currency. This implies that the value of one currency is declining while the other currency is appreciating in value, enabling a trader to benefit from a rising and falling market.
It is necessary to pay attention to bear and bull markets because they can influence the market trends of currencies. Well-informed forex traders can utilize market trends to enable them to make appropriate decisions about risk management and to open and close-fitting trading positions.
In a bear market, where pessimism about rising prices prevails, forex traders sell currencies in order to buy them cheaper in the future. Returning to the bear metaphor of a bear swiping its paws downward, similarly, a bear trader strives to reduce currency prices.
When traders expect the price of a currency to go down (depreciate), they will short the currency. To short a currency implies selling the particular currency with the expectation that its price will decline in the future, enabling a trader to buy the same currency back at a date in the future at a lower price. The difference between the higher selling price and the lower purchasing price is profit gained for the trader.
The strategy to short a currency is also referred to as short selling or shorting.
Trading in a bearish market can be risky because of over-selling and volatility. Therefore, trading on a bearish perspective should only be executed on the foundation of a well-defined and tested trading strategy.
A bearish market may change to a bullish one at any time. Usually, such a reversal occurs when a currency is oversold, and the current price is unacceptable to sellers. In such a situation bear traders will be unable to maintain the downward trend and will start closing short positions.
Bearish chart patterns
In forex trading, chart patterns are particular formations formed by the movements of currency prices. A pattern is recognised by a line that connects common price points, such as highs or lows.
A chart pattern is a crucial component of technical analysis, enabling forex traders to project how currency prices may act in the future, based on previous performances.
Typically, a bearish chart pattern reflects a reversal in trend from bullish to bearish, signalling lower prices are imminent.
There is an expansive range of bearish chart patterns, including the bear flag, bear pennant, head and shoulders, double top, and descending triangle, to name but a few.
As with bullish chart patterns, there is no ‘best’ bearish chart pattern, because each one of them can be used at a particular point in time to analyse a bearish market in order to take a specific trading position.
This article will further focus on the following three bearish patterns: Descending triangle pattern, ascending wedge pattern, and bearish pennant pattern.
Descending triangle pattern
In forex, a descending triangle pattern is a chart pattern that represents a consolidation, taking place in the middle of a specific trend, usually signalling that a prevailing trend will continue. The pattern is created by drawing two converging trendlines, pointing out that a price momentarily moves in a sideways direction. Forex traders frequently look for an upcoming breakout, in the direction of the preceding trend, as a sign to open a position.
The descending triangle pattern comprises a descending upper trendline and a flat lower trendline. This pattern signals that sellers are more prominent than buyers as the price continues to create lower highs.
A significant breakout at the lower trendline allows traders an opportunity to take a short position.
Ascending wedge pattern
The ascending wedge pattern, also referred to as the rising wedge, is a strong consolidation price pattern created when the price moves between two rising trend lines. Regardless of where the rising wedge appears, traders should bear in mind that this pattern is essentially bearish in nature.
Depending on location and trend prejudice, the rising wedge is a bearish chart pattern that can signal both reversal and continuation patterns.
Bearish pennant pattern
A pennant is a continuation chart pattern, created when a currency faces a large upward or downward movement, followed by a brief consolidation, continuing to move in the same direction.
Bearish pennants are continuation patterns that occur in strong downtrends. A bearish pennant is created in the following way:
- It starts with a flagpole – representing a steep decline in price.
- The flagpole is followed by a small symmetrical triangle, formed by two converging trend lines, and known as the pennant – indicating a pause in the downward movement.
- After the pennant, a breakout follows, and the downward movement continues.
The breakout below the pennant provides opportunities for traders to enter short trades.
Note: This article does not intend to provide investment advice and its aim is solely informative.
Frequently Asked Questions
Is Bearish up or down?
It means ‘down’
What does a Bearish market in forex trading mean?
Here is a helpful guide on what Bearish means in Forex trading.
Should I sell a bearish stock?
A bearish market give investors the opportunity to buy stocks on sale. If you are not worried about a price drop after you have bought the stock, or it is stock you wanted to own over a long period of time, the possible drop in price shouldn’t concern you that much.
How do Bearish investors make their money?
By selling the stocks short and if he is right about prices going down even further, he buys the stock back at a lower price and give them to a broker who return the shares to the client.
How long does a bear market usually last?
On average about 14 months.
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