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Glossary
Bull market
Definition
A bull market is defined as a sustained period of growth in the financial markets. The amount of time required for a period to qualify as a bull market can be subjective. As a general rule of thumb, a bull market occurs when prices increase (as a trend) for months and/or years.
Bull markets and the 20% rule
Some traders will assess a period of four weeks as a bull market. Others may only define the markets as being bullish after a period of several months. As a general guide, a bull market occurs when prices increase for months and/or years.Professional traders often use the 20% rule when defining a bull market. This "rule” should be taken as a guideline rather than a strict rule.
The 20% rule states that when typical share prices increase by 20% or more, the increase usually follows a bearish period (a period of time when prices decrease, which over time can be deemed a bear market). A bear market occurs when typical share prices fall by 20% or greater.
This means you have a period of contraction (of around 20%) followed by a period of growth (20%+). The period of growth could be classed as a bull market if it’s sustained over a prolonged period of time.
Why is understanding a bull market important for traders?
Financial markets and securities can increase and decrease in value over time. Knowing how to define these periods of growth and decline is important when making trading decisions.
Growth in financial markets is rarely linear. This means the price of a security won’t increase continually without any dips. For example, a tech stock might close at different prices over the course of five days:
Day 1: 229.10 USD
Day 2: 229.80 USD
Day 3: 228.70 USD
Day 4: 228.80 USD
Day 5: 230.20 USD
Five days isn’t enough to define a bull market. However, the price of the stock can be described as bullish in this scenario because, even though prices have dipped on certain days, the value is up overall. These fluctuations are common and expected. Prices rarely increase unencumbered.
A bull market is when the price of a security(or stock) is, after a sustained period of time, higher than it previously was. It doesn’t matter if there are small fluctuations on a weekly, daily, or even hourly basis. As long as you can zoom out and see the price steadily increasing over time, it’s likely that you’re looking at a bull market. It’s important to understand these nuances and how to look at the overall picture of the market when determining whether you’re looking at a bull or bear market.
Keep in mind that the term bull market can define individual stocks or markets in general. For example, we can say “the stock market is currently a bull market”. This means that the majority of high-value stocks are bullish. Understanding financial market terms like bull market is important for anyone investing in the markets to aid in analysis and decision making.