Bullish and Bearish Momentum

Bullish and Bearish Momentum

To start talking about Bullish and Bearish Trading, first, we have to understand what momentum is. This term aims to describe the speed or rate of change in price movement over some time. Traders use momentum to determine if the currency or stock is in an uptrend or a downtrend. Depending on this, an investor might decide to go long (buying shares) or short (selling shares).

A market or asset can go from being bullish to bearish and vice versa. An example of such change on a big scale is when the cryptocurrency market was bullish during 2018. Then a shift happened to bring the markets back down to a bearish state from 2018 till 2021 when ir reached all-time high prices. In other words, momentum isn't necessarily a predictor of price movement but instead reflects the overall mood of the market.

It is also important to note that minimal changes in the markets are usually not perceived as momentum. Instead, traders use this term to describe the change of price over a more extended period. Small movements, most of the time, are referred to as a market correction. However, not all long term movements are bullish or bearish as well. Traders consider some long term price movements to be a period of stagnation as the market finds a direction.

Bullish

To put it simply, being bullish means having a rising price. Bull investors may attempt to profit from an increase in prices. This is quite a traditional way to view investment or trading opportunities. Traders that are Bulls buy an asset at a low price and sell it at a higher one, thus making a profit from the price increase. A thing to note is that this type of investing or trading does not require already having access to the asset, unlike for bearish momentum trading.

For a simple example of being a Bull trader, let's say you want to trade a hypothetical cryptocurrency called COIN. You buy 100 COIN for 10 EUR apiece. You have now spent 1000 EUR on COIN and are waiting for the cryptocurrency price to go up. If the COIN rises in value and you sell it at the price of 11 EUR apiece, then you have just made a profit, having invested 1000 EUR and selling for 1100 EUR. If the COIN price goes down to 9 EUR apiece, you have made a loss by initially investing 1000 EUR and only selling for 900 EUR.

Bearish

On the other side of the spectrum, we have bearish momentum. This means that the price of an asset is declining. So-called Bear investors may attempt to profit from a price decline. In many ways, this type of investing or trading is very different from traditional strategies because you profit when the market falls and lose money when it rises. Usually, this involves short selling when you buy low and sell high, but bear trading does it in reverse order - selling first and buying later.

For a simple example of being a Bear trader, let's use the same hypothetical cryptocurrency - COIN. You short 100 COIN for 10 EUR apiece. You now have 1000 EUR, but you are now 100 COIN short. What you do now is wait till the price of the cryptocurrency goes down so you can re-buy the 100 COIN for a lower price. If the COIN price goes down to 9 EUR apiece, you make a profit since you initially received 1000 EUR for the 100 COIN and only are spending 900 EUR to get them back. Whereas if COIN’s price goes up to 11 EUR, you will be paying more to rebuy them than what you initially had received for selling them.

Calculating RoC and Momentum

It is a fact that stocks, currencies or other assets experience price changes and shifts in momentum. These shifts can also have different speeds at which they are approaching momentum changes. A helpful indicator by which an investor or trader can calculate this changing speed is the rate of change (RoC). The calculations compare today's closing price to a closing price X days ago, as chosen by the trader. 

Similarly, it is possible to calculate the momentum to know the speed of the market's change. Momentum, however, subtracts the previous day's closing price from that of today. The only difference between the two indicators is that the RoC displays the rate of change in price as a percentage, whereas the momentum indicator displays the rate of change as a ratio.

So if a trader or investor takes a few different prices throughout the week, for example, using the RoC or Momentum calculation, they can then plot these numbers onto a graph and see if the Momentum/ RoC is rising or falling. When prices of an asset rise but momentum or RoC falls, a top is likely near. Many different charting software programs and websites can measure Momentum or RoC so that investors don't have to calculate it by hand. The possibility to view the RoC and Momentum is also available at SpectroCoin Pro.

It's important to note that momentum is a good indicator for determining price movements. However, like most things, it is best to combine momentum with other indicators and accompanying characteristics that influence asset price movements when making investment and trading decisions. Additionally, it might be useful to note that bull markets actually tend to be longer and more frequent than bear markets. The average bull market lasts over 2.5 years.

The Bottom Line

Answering which type of trader you should be is no easy task and primarily depends on your views and outlooks of specific markets and assets. It can be challenging to predict the direction of a market, but that doesn’t mean you shouldn’t take a position. One of the most important things to do when trading is to manage your risk effectively and to protect your capital.

  Cryptocurrency exchange for traders is available on SpectroCoin Pro.

We hope this blog post was helpful in understanding the basics of Bearish Bullish and Bearish Momentum. To learn more about trading, cryptocurrencies and other related topics be sure to visit the SpectroCoin blog.

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