Said markets present anticipated price developments daily, weekly, monthly and yearly, and when scouting for profits, bidding investors will act according to the market sentiment.

If the anticipated price development of a market’s stock is upwards, meaning the value of certain stock is rising or expected to rise, as a consequence of trends, single events, supply materials, current affairs or many other factors, the market sentiment is expressed as bullish. Vice versa, if the anticipated price development is on the downtrend, by any of the same reasons, the market sentiment is expressed as bearish.

It isn’t always as simple as this however. Market sentiment is also considered to be a contrarian indicator. For example, extremely bearish markets may subsequently display dramatic spikes – the turning point for this is often where the risky decision making appears.

Market sentiment, the overall expression of a certain market as bullish or bearish, is normally determined by a variety of technical and statistical methods that factor in the comparisons of advancing & declining stocks as well as new lows & new highs in the market. One of these is known as the Relative Strength Index (RSI); it relates the number of assets bought to assets sold, indicating whether capital is flowing in or out of the market in question. Normally, as a market follows sentiment either way, the flock follows, meaning the overall movement of the market’s stock follows the market sentiment directly. To quote a popular Wall Street phrase: “all boats float or sink with the tide.” The more investors buy, the more investors buy; it’s usually exponential development.

This of course could happen indefinitely, if it weren’t for the fact that as stock trading volumes rise, as does the price. Eventually the price hits a market high and the potential for profits is minimized. At this point the fall to a bearish market usually comes to fruition. On the other hand, as trading volumes fall, prices go down, to the point where eventually the price is so low it would be foolish not to buy, therefore turning the market on its head.

As obvious as it may seem, the words bullish and bearish reflect exactly what you would expect and are not simply paraphrases. An optimistic investor, happy to buy, buy, buy as the market sentiment is bullish, is considered a bull; aggressive, optimistic and almost reckless, striking upwards with its horns. Equally a bearish investor is considered a bear because he or she does not trade without utmost consideration, he or she is pessimistic towards trading expectations and believes prices will fall, or fall further than they already have. The bear therefore decides to sell, sell, sell, and pushes the prices down; as a bear that strikes its paws to the ground.

Make sure you check one of our top read features ‘The Top 10 Greatest Stock Market Trades Ever’.