In this tutorial I will briefly discuss the concepts of bearish and bullish markets. As a student chart technician you need to fully understand this if you are to be successful at currency trading. Especially if you are a short term, or day trader.
I will start by explaining what a bearish market is. Any financial market always strives to remain in “balance”. When price moves (in time) on a chart, the price itself is always governed by the “balance” between buyers and sellers.
If, at any time, there are more sellers than buyers, then the price will be moving down. This is known as a bearish market. The price moves down because the majority of sellers are all trying to sell the same thing to a minority of buyers. The only way they can compete for those fewer buyers is by dropping their prices, and thus the market moves downwards.
As an analogy, think of a row of shops in a shopping mall all selling the same type of bread. There are only a fixed number of shoppers (buyers) in the shopping mall at any given time. So, because there is so much bread available, the only way that each shop can compete with the adjacent shops, and attract buyers, is to constantly drop their price.
Consider the other side of the coin now. If there are more buyers than sellers then the price will be moving upwards. This is known as a bullish market. Now, using the same shopping mall analogy as before. This time there are only a very few loaves of bread available in the shopping mall, and a lot of shoppers (buyers). So the shop owners (sellers) can keep increasing their prices to almost anything they want as the bread starts to run out. They know that there will always be a buyer who is prepared to pay the higher price for the very scarce bread.
You may ask yourself why a market moving in a particular direction does not keep moving in that direction forever. Well the fact of the matter is – in a bearish market, a point is eventually reached where the sellers are simply not prepared to sell for lower prices. They elect instead to hold on to their “stock” rather than sell it at a loss. At this stage the downward movement (bearish direction) in price halts, and the market starts to reverse (become bullish). This is what causes the market to “cycle”.
As you can see now, the direction of a market at any given time – whether it is bearish or bullish – is determined ONLY by supply and demand.