All markets swing between bullish and bearish periods. For example, from January 2017 — January 2018 the total cryptocurrency market capitalization increased from $15 billion USD to $700 billion USD. This was clearly a bullish market period as there was substantial growth (higher than national inflation rate) during a short period of time.
However, between January 2018 to January 2019 the total cryptocurrency market cap fell from $700 billion USD to $91 billion USD. In only a year the cryptocurrency market cap fell by 87%. This was certainly a bearish time for the cryptocurrency market.
With such vast swings occurring in the cryptocurrency market, it is important that we can recognize two things. Firstly we must be able to recognize whether we are in a bull or bear market. Secondly, through education ourselves we can increase our ability to recognize market troughs and tops. Through increased recognition of these two factors, we can increase our likelihood of portfolio valuation increases.
Lets start off with the first factor — determining whether a market is bullish or bearish.
What is a bear market in crypto?
Bear markets refer to a period of time during which investors focus on long term negative price movement. When bear markets occur, cryptocurrencies tend to lose significant value over extended periods of time. The most infamous bear market seen in crypto was 2018. During 2018 many cryptocurrencies lost over 90% of their value in less than a year.
What is a crypto bull market?
During bull markets investors focus on long term positive price movement. Positive emotions surround the market as investors’ portfolios often see extended periods of increased value. Cryptocurrencies see substantial market capitalization increase as increased demand from numerous investor types look to buy cryptocurrencies. This results in major positive price movements in the crypto markets.
How can we determine whether we are in a bullish or bearish market?
The first way analysts can determine whether a market is bullish or bearish, is through the use of indicators. There are many indicators which can be used on high time frames in order to help determine whether a market is bullish or bearish such as:
One of the most widely used indicator mixes for determining whether a market is bullish or bearish is the combination of the 50 day MA and 200 day MA. When the 50 MA and 200 MA cross, either a golden cross or death cross are created.
The golden cross occurs when the 50 day MA crosses above the 200 day MA. This crossover represents a bullish long term momentum change. From this momentum change, a substantial bullish rally typically occurs. Therefore, if a golden cross occurs and the 50 day MA is above the 200 day MA, the cryptocurrency market is bullish.
Death crosses are the opposite of golden crosses. This is when the 50 day MA falls below the 200 day MA. Once the death cross occurs, the market is traditionally viewed as bearish.
Death / golden cross conclusion
Through mapping out all golden and death crosses, we can get an overall picture as to whether the market is bearish or bullish.
This mapping does give us a relatively accurate judgement of market sentiment. However, the issue with these crosses is that they are heavily lagging indicators. This means that the tops and bottoms of markets are missed. We will further look into selling tops and bottoms / spotting the market sentiment flip early later…
On-chain analysis uses data from the Bitcoin blockchain in order to create new indicators. Traditional indicators are typically some form of equation with the input being price data. However, on-chain indicators are something unseen before, as these are not possible in the stock / forex / commodities markets (they have no blockchain). The top two indicators for determining whether the market is bullish or bearish are the Puell Multiple and the Bitcoin RHODL ratio.
On-chain indicators conclusion
Wide usage of on-chain indicators is a relatively new phenomenon within the cryptocurrency world. If they manage to catch the current 2021 bull run top, on-chain indicators could slowly erode the popularity of traditional cryptocurrency market analysis. They are something to keep your eye on as you wonder whether we are bullish / bearish and our position within the current run.
How to weather a bear market
All traders need to set up an effective risk-management strategy in order to minimise risk if the markets go against them. This is less of a problem in a bull market when there are likely to be opportunities to recoup former losses by buying a security as it is revalued higher. But trading in a bear market can be more difficult. To keep your head when everyone in the financial market is stampeding towards the exits requires the ability to be decisive and act quickly. And this has to be backed up by a solid understanding of the technical resources that are available to help manage your trading account.
The standard trade management tools apply in a bear market. In particular, that means ensuring appropriate trade execution orders have been used. A stop-entry order is simply an order to buy or sell a security when its price moves past a particular point. A limit entry order can help to diversify a trader’s game plan by making it possible to short into rallies in a bear market. These orders bring some predictability to a trading strategy by making sure trades are executed at a predefined price. Some traders prefer to take more active control of their account and not to be automatically taken out of their position.
Stop loss orders are a useful tool to close an open trade that is going against you at a predefined price level to limit the loss of capital. However, markets can move fast and this is often the case when they turn bearish. Bear markets don’t head down continuously — prices may pull back from time to time. This means traders may risk being stopped out when the market was simply consolidating, rather than making a fundamental shift.
Traders aren’t always guaranteed to get closed out at the price they set their stop-loss orders at, which is known as slippage. The faster the market moves, the greater this slippage can be. To circumvent this, you might choose to trade an option with a strike price where a stop-loss would have been located. This could allow you more time to evaluate whether or not you are truly in a losing position.
Top 4 bull market strategies
Bull market trading strategies offer best practice techniques to consider when bull trading. Although these strategies are based on past performance, they do not guarantee future results.
Here are some bull market trading strategies you can employ when you think a market’s price is on the up:
“Buy” early in the bull run
While the exact onset of a bull run may be tricky to gauge, a method to confirm its recent commencement is the third touch of a price action on a single line (eg as seen in the higher highs and lower lows chart above). With an expected continued upward trajectory, this tends to be a good time to take a long position.
Don’t sit on losses for too long
Planning your exit beforehand can help in limiting losses. One way of doing this is deciding to close your position if the price closes below the trend line. Alternatively, you could opt to short-sell if you’re expecting a decline, be it sharp, steady, temporary, or sustained in a bearish manner, if you think that the bull run has run its course
Take profits at regular intervals
Aiming to lock in profits at regular intervals is one way you can secure, or maybe even stack up on, trading profits.
Follow the market momentum
It’s said that ‘the trend is your friend’. It’s important to note that despite the steady, prolonged increase of price in bull market runs, it still consist of both rising and falling share prices. This means that it’s possible to incur losses on a bull position in a bull market, or make a profit on a sell position. Therefore, it’s essential to analyse the goings-on of a bull trend comprehensively before making a move, whilst taking action timeously.
Bull or bear market conclusion
There are numerous ways to determine whether the market is currently bullish or bearish. The most widely recognised method is through using bullish and bearish death / golden crosses. As mentioned earlier death and golden crosses lag significantly. Let’s take a look at factors which can point towards the end of a bull or bear market.
Sources : academy.aaxspace.com