For the inexperienced trader shop talk sounds like a bunch of guys and gals talking about Sunday’s football game. With moves forward and back, quick turnarounds and bears and bulls all that’s missing is a stadium. One critical concept a new trader needs to understand is the differences between those bears and bulls and how to make a bear earn you some money.
What’s the Difference?
For any market, Forex or otherwise, a bear market describes a period when the general feeling about the market is pessimistic. Prices are falling causing investors to get scared and try to sell as fast as they can before they lose any more money. A true bear market is noted by a 20% decline in prices in a key stock market index. If that trend continues past two months, then entry into a bear market has officially begun. If the market makes a sudden turn a round before the two month period than investors make a universal sigh of relief and call that turbulent time a correction.
A bull market is the polar opposite of the bear. Investors are feeling good, and pumping the market with money. This causes prices to soar making it easier to make money off of investments.
With Forex trading, each country’s individual economy determines whether its currency is acting like a bear or a bull. The value currency is a reflection of the country’s economic state. A country that is experiencing high amounts of layoffs and a low level of confidence in the economy will have a bearish currency, while its counterparts who are enjoying a strong economy will have a currency that is on the uptrend.
The Bearish Currency
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A bearish Forex trader is one who is still managing to make a profit, even though prices are dropping. Where they differ from other trading venues is that with currencies, one will typically have to rise in value to compensate for those that are falling. So even though your usual bullish currency may have suddenly shifted direction, its counterpart is going to have to do the same.
This is what is known as trading in a zero sum market. Think of it like a balance scale. When you apply pressure to one side the other side reacts by moving in the opposite direction. The same is true with currencies, so in effect what you have with Forex trading is a market where even though the bears have a stronghold, there still has to be bulls left in the game.
To figure out if your currency really has become bearish, you must first study it as it compares to an assortment of its different partners. Only looking at its price action against one or two other currencies is not enough to call it bearish, it needs to be showing a decrease in value across the vast majority of the board.
Trading the Bear
The more conservative trader is going to tell you that if your currency is showing bearish behavior it might be time to call a time out. This is probably good advice for a new investor, especially since they could use that time to start expanding their horizons into studying how other currency values are being controlled.
The other option you have is to switch sides and invest in the bear currencies counterparts. If you are typically trading USD/JPY and the dollar starts to fall there, first look at the USD/CHF and USD/CAD. These three currency pairs have a tendency to react to market changes in the same way. If the dollar is showing signs of weakness in all three then you can consider changing your normal trading strategy to reflect growth in the yen over the dollar.
That is just one example, but you get the idea. Don’t bank on the actions of just one pair to dictate your strategy. You need to see how correlated currency pairs are also behaving.
One last strategy you can try if a currency is losing value is to go long. This will require a hard look into the trend to determine a perfect exit strategy, but if you have patience, and are not a nail biting trader this is a good way to cope with a bear currency. Make sure that you measure your risk to reward ratio and work a stop loss into your plan just in case you missed the ball on your chart reading.
Recognizing an Oncoming Bear
You should also be aware of some basic chart signs that indicate when a currency is about to turn into a bear. The easiest one for a trader to pick out is the hanging man on a candlestick chart. This type of candlestick looks will be seen at the top of a chart, close to the line of resistance and is characterized by a short black or red body and a very long bottom wick, with practically no upper wick.
The hanging man will appear after a series of candlesticks showing strong growth of the currency, and indicates that the sellers are beginning to control the price. As you watch the pattern emerge, you will see that not long after a hanging man the currency reverses as the number of sellers increase and force the price of the currency to drop.
Trading currencies can be a tricky game if you are not familiar with bears and bulls, how to spot them and how to react. Whether you decide to sit it out, switch sides or go long, make sure that you are measuring your risk wisely and making notes in your journal of all of your moves. Once you learn the moves of a bear, making profits from them will come naturally.
Casey Stubbs is the founder of WinnersEdgeTrading.com which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.
