Bull Market Trading Strategy —Backtesting and Practical Example

As a stock market trader, you must have been conversant with the phrases like a bull, a bull run, and a bull market. Those are phrases used to describe buying sentiment in the market. But what actually does bull market trading strategy mean?

Bull market strategy refers to the methods and techniques employed by traders and investors to benefit from a bull market. This includes entry, exit, trade management, and risk management strategies traders use to gain the most benefit from the market during a bull run.

In this post, we take a look at some bull markets in history and at the end of the article, we look at a bull market trading strategy.

Related reading: – Are you looking for other bull market trading strategies? (We have plenty more)

What is a bull market?

A bull market refers to a market condition where the prices of assets are rising steadily. Since the prices of many assets rise and fall all the time, the term “bull market” is typically used to describe an extended period — months or even years — when the prices of securities are in a sustained uptrend. Although commonly used to describe the stock market, a bull market can also be used to describe other asset markets, such as the commodity, bond, foreign exchange, and real estate markets.

There is no standard definition for a bull market, as regards the value of price appreciation. However, in the stock market, one commonly accepted definition of a bull market is a period, lasting at least six months or more, when any of the broad market indexes, such as the S&P 500 Index or the Dow Jones Industrial Average (DJIA), rises by 20% or more, from the low of a preceding 20% decline (bear market).

For many retail and institutional traders, a simple way to identify a bull market is to use the 200-day moving average of the S&P 500 Index. When the 200-day moving average of the S&P 500 is sloping upward and the index is trading above it, the market is considered to be in a bull market. We have covered the 200-day moving average extensively in a separate article. Please read here for how to use the 200-day moving average strategy in trading.

A bull market is marked by high levels of optimism, investor confidence, and expectations that strong results should continue for an extended period of time — what traders and investors call bullish sentiment. One thing is clear though: it is difficult to predict consistently when the trends in the market might change, as herd mentality and speculation may sometimes play a large role in the markets.

Note that a bull market always follows a bear market; however, there may be a period of accumulation in between. Also, a bull market is not considered to have ended until another bear market is confirmed, but again, there may be a period of distribution in between. According to Richard Wyckoff, the market moves in cycles — accumulation, a bull market, distribution, and a bear market.

What causes a bull market?

There is no one cause for a bull market, but it tends to come during a period of economic prosperity, evidenced by strongly growing gross domestic product (GDP). This often coincides with periods of reduced unemployment rates and increasing corporate profits. With more corporate profits, companies employ more people and increase wages. As a result, there are more people earning more money than they need for immediate needs, which leads to more savings and investments — as more people have sizeable savings, they tend to invest them in the stock market.

With more people investing in stocks, the demand for stocks increases, while supply reduces as many people won’t have the need to cash out on their stocks and may not be willing to sell. In essence, supply will be weak while demand will be strong. In a bull market, investors are more willing to take part in the (stock) market in order to make profits — many will be eager to buy securities, while few will be willing to sell. The increased demand for stocks and reduced supply drive prices higher.

In addition, there is increasing investor confidence, optimism, and high expectations of positive results — the market tends to have an overall positive tone. Also, there is an increase in the number of companies issuing their stocks to the public for the first time (IPO). Some of these factors are easily measurable, but others are not. For example, unemployment rates, wage increases, GDP growth, and corporate profits are measurable. However, other factors, such as investor confidence and the general tone of the market, may be difficult to quantify.

What does a bull run mean?

A bull run means the same thing as a bull market. It refers to an extended period in the market when overall stock prices are on the rise. While there’s no formal metric that defines the term, one common rule of thumb is to consider a broad market index gaining a 20% increase from the most recent low to be in a bull run. In a bull run, the market show signs that prices will continue to grow, as there would be fear of missing out (FOMO)<