How to trade binary options in Bullish and Bearish markets

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Trading Terms – Bears, Bulls, Hawks, And Doves

Understanding important trading terms is an essential skill of any successful binary options trader. This article explains four of the most important terms – bullish and bearish, and dovish and hawkish.

  • What Do Bullish and Bearish Mean?
  • How Can I Trade Bullish And Bearish With Binary Options?
  • What Do Dovish and Hawkish Mean?
  • How Can I Trade Dovish and Hawkish With Binary Options?

With this knowledge, you will understand what financial experts mean when they talk about these terms, and how you can use these trading terms – and associated sentiment – with binary options.

What Do Bullish and Bearish Mean?

The terms bullish and bearish define whether traders think that prices of an asset will rise or fall in the future. They are also used in hindsight to describe rising or falling markets. They are common trading terms in the written press.

  • Bullish: When traders are bullish about an asset, they believe that its price will rise. Bull markets feature rising prices.
  • Bearish: When traders are bearish about an asset, they believe that its price will fall. Bear markets feature falling prices.

After the 2008 financial crisis, the market was bearish. The Dow Jones lost more than half of its points, and stocks indexes around the world fared similarly tough losses. Since then, the market was bullish again, rising to new record heights.

How Can I Trade Bullish And Bearish Sentiment?

For binary options traders, bullish and bearish are important terms. The simplest way of connecting the terms to your trading is this:

  • Invest in rising prices during bull markets and when traders are bullish about an asset.
  • Invest in falling prices during bear markets and when traders are bearish about an asset.

There are a few ways in which you can do this:

  1. Read the news. The news is a good source to understand how traders feel. There are plenty of interviews with traders and even specialised trading magazines, but you can also read the regular news and connect the dots for yourself. When a company faces legal struggles, traders are probably bearish; when a company posted record profits, traders are probably bullish.
  2. Subscribe to a newsletter. There are special newsletters that tell you how traders feel about the market. For example, when a big analyst recommends to buy or sell a stock (because they are bullish or bearish for that stock), these newsletters will tell you about it. You can then trade the effects of the recommendation with binary options.
  3. Use technical indicators. There are technical indicators such as the bulls and bears indicators that aggregate the information of how traders feel about the market. Some of them use mathematical calculations based on price action, some evaluate multiple newsletters and compare positive to negative recommendations. The absolute values of these indicators and their changes over time can tell you where the market will go.

These sources can tell you how traders feel about the market. There is also another type of technical indicator that measures bullish and bearish momentum indirectly – oscillators.

Technical indicators such as the Relative Strength Index (RSI) relate the numbers of assets bought to assets sold. Their goal is to understand whether money is flowing into an asset or out of it. They help you understand how traders feel about an asset without having to ask every trader for yourself.

These indicators also help you understand an ironic twist: when traders are too bullish or too bearish, they will often cause the exact opposite of what they intend. For example, when all traders are bullish about an asset, soon all of them will have invested in the asset. Now there is one left to buy, but some of the many traders who have bought will think about selling. The result is a surplus of demand, and the price will fall – despite an overwhelmingly bullish market.

Bullish and bearish are great indications for what you should do. But when everyone is bullish or bearish, be careful.

What Do Dovish and Hawkish Mean?

Dovish and hawkish are terms that describe a government’s fiscal policy. Like bullish and bearish, they describe opposites, but this time opposites of fiscal policy.

  • Dovish: Dovish describes an expansive fiscal policy. Low interest rates make credits cheap and savings unprofitable, an increasing government debt creates new money. Both effects combine to flood the market with money. Central banks usually act dovish when they want to stimulate economic growth but accept the downside of increasing inflation.
  • Hawkish: Hawkish describes a restrictive fiscal policy. Higher interest rates make credits expensive and savings profitable, reduced government debt reduced the amount of available money. Both effects combined take money out of the market. Central banks usually act hawkish when they want to fight inflation but accept the downside of limiting economic growth.

After the great crisis of 1923, governments reacted hawkish, trying to save as much money as possible. After the crisis of 2008, governments reacted dovish, trying to stimulate economic growth through debt and low base rates.

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How Can I Trade Dovish and Hawkish Sentiment?

To understand how a hawkish and a dovish fiscal policy affect binary options traders, consider the effects of both policies.

A dovish fiscal policy will push the market up

When the government floods the market with money while at the same time making savings unprofitable, this money has to go somewhere. Many people will invest it in stocks, which are the only viable investment option left. Additionally, the high amount of available money will increase economic demand, which will enable companies to post record earnings.

The increasing inflation also that the stock market has to rise significantly. When the price of bread rises from £1 to £2, the price of a stock that used to trade at £100 has to rise to £200 just to reflect the decreasing purchasing power of the currency. For example, when the price of a Coke doubles, the profit of Coca-Cola will double, too. Even if the company does not become more valuable, the same value will now be expressed by a price twice as high.

Combined, the stock market will rise for as long as the dovish fiscal policy remains in place.

A hawkish fiscal policy limits economic growth

When a government acts hawkish, it causes the opposite effects of a dovish fiscal policy. It limits inflation, which means that stocks have to rise less to reflect the decreasing purchasing power. It also takes money out of the market and makes savings more attractive, which is why people will have less to invest and prefer other investments over stocks. Combined, the stock market run will lose energy.

Now, none of that is to say that a hawkish fiscal policy will be bad for the economy or crash the markets. In a well-functioning economy, central banks must act hawkish to some degree to prevent uncontrolled inflation, poverty, and other disastrous effects. This is why the market can keep rising during hawkish areas of fiscal policy.

How To Trade Dovish And Hawkish Fiscal Policies

The important point is that stock traders will always prefer a hawkish fiscal policy because it pushes stock prices further than a dovish fiscal policy. They care about stock prices, not smart policies. In is an important trading term.

Binary options traders have to understand this connection and trade accordingly. Binary options traders can trade the effects of both policies directly by investing in long-term binary options. These options have expiries of months and years, which allows you to take advantage of such fundamental market influences as fiscal policy.

We recommend using them for market indexes instead of single stocks. Single stocks are subject to many other influences, for example good or bad management and technological progress. They might fall despite an expansive fiscal policy. The market as a whole, however, must react to fiscal policy. When the market is flooded with money, this money must go somewhere. The stock index will reflect this unavoidable connection and rise.

You can also trade the market’s reaction to the announcement that reports changes in a government’s fiscal policy. Most traders understand the connection between a dovish/hawkish fiscal policy and future stock prices, which is why they immediately invest in anticipation of its effects when a central bank changes its base rate or a government plans to make more debt.

Conclusion

Understanding whether a government acts dovish or hawkish allows you to predict what will happen to the market next. Bearish and bullish are terms that describe how markets behaved in the past, and whether traders expect rising or falling prices in the future.

Both types of terms are important for binary options traders and can be the basis of your strategy. Properly understand and correctly interpreted, they provide certain predictions and a deeper understanding of the forces that drive the market.

Binary Options Trading in Bullish and Bearish Market

As an investor, you must have heard about two different market directions – Bullish and Bearish. The Bullish market implies a certain increase in prices which reflects the investors’ confidence. In turn, the Bearish often indicates a decline in the economic market. Both markets are affected by the economic situation in the world or in a particular country.

Since the Bull means that the market is currently strong, bullish investors prefer to buy more. As the matter of fact, this contributes to the further increase in the economy.

Talking about the Bear, it characterizes the conditions at which the market seems to be weaker. There is phrase which sounds like “panic selling” and it accurately describes the investors’ sentiment towards the weak market. When afraid of losing money, investors start massively selling their stocks. Consequently, this leads to a further decline and possible depression.

In this article we will discuss how Bulls and Bears are linked to the binary options trading. So, let’s begin!

Advantages of trading options in Bullish/Bearish Market

The truth is that it is impossible to know how long the bullish trend will last in the market and an abrupt change to the Bear market is quite possible. If that is the case, investors who purchased stocks in the bull market can observe their profits turning into losses.

However, things go differently in binary options trading. Options trading in either Bull or Bear market implies following simple rules: to Call at the Bullish market and Put at the Bearish market. Nonetheless, inexperienced traders can make spontaneous decisions that lead to losses.

Still one of the advantages that binary options trading provides is that you can make money during the hard times for the rest of the economy. Either Bullish or Bearish market, you can take advantage of both.

The key approach to understand Bullish or Bearish market is reading news and analyzing various events taking place in the world in the particular time. For instance, the low unemployment level and stocks in an uptrend generally signify the Bullish market. When things are completely the opposite – it is the Bearish market. Your assignment as binary options trader is be ready to determine the turning point.

Signs to help in identifying Bearish or Bullish market

Being an investor means constantly experiencing Bullish and Bearish market in the trading cycle. Even if you do not plan to lose money on the markets you are still exposed to general rules. However, in binary options trading every part of the cycle is just a new opportunity. The main trick to make profit is to define when to Call and when to Put.

It is known that Price Surplus is the comparison of the stock’s share price with the dividend paid out during the year. To calculate Price Surplus you have to divide the stock price by the dividend. Hence, you can receive the results like this: a drop would propose a good rate and an increase could be the indicator of weakening. It is important to admit that this varies from one industry to another. When these ratios are on the rise then some industries pay out their dividends, whilst others frequently do not actually pay out at all.

You should also make the Progress & Weakening sign as the tool of determining the market direction. It represents the number of the strengthening stocks and the number of the weakening stocks within the economic cycle. So, the bullish market will be represented by an increase of 20% with in any market at any given time. Completely the opposite is true for the Bearish Market. Evidently, a rise in the market shows strength and prices are on the climb.

There are also some things to pay attention on. A correction in the market would be when prices keep on rising and markets are actually on the decline. The market will become Bearish if the decline continues over a longer period of time. Contrarily, if rises continue more than several months and the averages have declined then you will witness the beginning of the Bullish market.

In order not to be overwhelmed by the changing market sentiment and market direction, you need to create the trading plan and stick to it.

Bearish Market Trading Strategies

When your outlook on an underlying security is bearish, meaning you expect it to fall in price, you will want to be using suitable trading strategies. A lot of beginner options traders believe that the best way to generate profits from an underlying security falling in price is simply to buy puts, but this isn’t necessarily the case.

Buying puts isn’t a great idea if you are only expecting a small price reduction in a financial instrument, and you have no protection if the price of that financial instrument doesn’t move or goes up instead. There are strategies that you can use to overcome such problems, and many of them also offer other advantages.

On this page we discuss the benefits of using bearish options trading strategies, and some of the disadvantages too. We also provide a list of the ones that are most commonly used.

  • Why Use Bearish Options Trading Strategies?
  • Disadvantages of Bearish Options Trading Strategies
  • List of Bearish Options Trading Strategies

Why Use Bearish Options Trading Strategies?

First, we should point out that purchasing puts is indeed a bearish options trading strategy itself, and there are times when the right thing to do is to simply buy puts based on an underlying security that you expect to fall in price. However, this approach is limited in a number of ways.

A single holding of puts could possibly expire worthless if the underlying security doesn’t move in price, meaning that the money you spent on them would be lost and you would make no return. The negative effect of time decay on holding options contracts means that you’ll need the underlying security to move a certain amount just to break even, and even further if you are to generate a profit.

Therefore, buying puts options is unlikely to be the best strategy if you are anticipating only a small drop in price of the underlying security, and there are other downsides too. This isn’t to say that you should never simply buy puts, but you should be aware of how some of the downsides can be avoided through the use of alternative strategies.

There is a range of trading strategies suitable for a bearish outlook, and each one is constructed in a different way to offer certain advantages. An important aspect of successful trading is to match a suitable strategy to whatever it is you are trying to achieve on any given trade.

As an example, if you wanted to take a position on an underlying security going down in price but didn’t want to risk too much capital, you could buy puts and also write puts (at a lower strike) to reduce some of the upfront cost. Doing this would also help you offset some of the risk of time decay.

Another way to reduce the negative effect of time decay would be to include the writing of calls. You can even use strategies that return you an initial upfront payment (credit spreads) instead of the debit spreads that have an upfront cost.

Basically, bearish options trading strategies are very versatile. By using the appropriate one you cann’t only profit from the price of the underlying security falling, but you also have an element of control over certain aspects of a trade like the exposure to risk or the level of investment required.

Disadvantages of Bearish Strategies

Although there are clear advantages to using bearish options trading strategies other than simply buying puts, you should be aware that there are some disadvantages too. Most of them usually involve a trade off in some way, in that there’s essentially a price to pay for any benefit you gain.

For example, most of them have limited profit potential; which is in contrast to buying puts where you are limited only by how much the underlying security can fall in price. While this isn’t necessarily a huge problem, because it’s reasonably rare for a financial instrument to drop dramatically in price in a relatively short period of time, it does highlight that to get an extra benefit (such as limited risk) you have to make a sacrifice (such as limited profit).

In some respects, the fact that there are a number of different strategies to choose from is a disadvantage in itself. Although it’s ultimately a good thing that you have a selection to choose from, it’s also something of an extra complication, because it takes extra time and effort to decide which is the best one for any particular situation.

Also, because most of them involve creating spreads, that require multiple transactions, you will have to pay more in commissions. In truth, though, these disadvantages are fairly minor and far outweighed by the positives. The fact is if you can become familiar with all the various strategies and adept at choosing which ones to use and when, then you stand a very good chance of being a successful trader.

List of Bearish Strategies

Below is a list of the more frequently used strategies that are suitable for when you have a bearish outlook. There’s also some brief information about each one: including the number of transactions required, whether a debit spread or a credit spread is involved, and whether it’s appropriate for beginners.

You can get more detailed information on each one of these by clicking on the relevant link. If you would like additional help in choosing a strategy, then you can use our selection tool which you can find here.

This is a single position strategy that involves only one transaction. It’s suitable for beginners and comes with an upfront cost.

Only one transaction is required for this single position strategy, and it produces an upfront credit. It isn’t suitable for beginners.

This simple strategy is perfectly suitable for beginners. It involves two transactions, which are combined to create a debit spread.

This is relatively straightforward strategy, but it requires a high trading level so it isn’t really suitable for beginners. A credit spread is created using two transactions.

This is complex and not suitable for beginners. It requires two transactions and can create either a debit spread or credit spread, depending on the ratio of options bought to options written.

This is fairly complicated and not ideal for beginners. A credit spread is created and two transactions are involved.

The bear butterfly spread has two variations: the call bear butterfly spread and the put bear butterfly spread. It’s not suitable for beginners; it requires three transactions and creates a debit spread.

This requires three transactions to create a debit spread. It’s not suitable for beginners due to its complexities.

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