Trade Bull or Bear in the Forex Markets

Effective long and medium-term trading strategies in all markets typically involve identifying the major underlying trend and then trading with the trend’s overall direction.

This tends to hold true regardless of whether the trend consists of an upward trend or bull market, or a downward trend that is otherwise known as a bear market.

Bear Markets and Stock Trading Regulations

Because of the regulation which many traders consider to be excessive, stock traders are often limited in their ability to take short positions in stocks. This can significantly affect the scope of their trading opportunities, especially in bear markets.

The reason for these numerous rule changes involves the stock market’s various crashes which have occurred historically. These regulations have the overall effect of making the shorting of stocks increasingly difficult in declining markets.

Basically, traders are only permitted to short a stock on an uptick in its price. This so-called short sale rule has even been expanded recently to prohibit the shorting of financial stocks altogether when the market has declined by a certain percentage.

In addition, because of the fact that currencies trade in pairs, all currencies cannot decline simultaneously in the forex market. This differs from stocks, which can all move down simultaneously in a typical bear market crash scenario. This is the primary reason that the short selling regulations were instituted in the first place.

Trade Bear Markets in Forex Easily

Unlike the stock market, the forex market is comparatively unregulated. This allows traders to sell short regardless of the direction of the last sale, which is how this regulation works in the stock market. In essence, the forex market allows traders to go short any currency pair as long as a bid price can be found in the amount they wish to deal.

Because of the lack of restrictions in the forex market, bull and bear markets remain equally easy to trade. Also, because of its unregulated nature, moves in the forex market are usually dictated by the levels of supply and demand in the market, although at times central banks may intervene to stabilize their currency.

Basically, the forex market allows traders a more equitable and efficient marketplace in which to operate. This makes trading just as easy in a bear market as in a bull market.

The U.S. Dollar’s Trend Creates Bull and Bear Forex Markets

In the stock market, individual stocks will tend to trend according to the company’s prospects and for the market generally.

Nevertheless, stocks which perform poorly will still rise in a bull market, while high performing stocks with strong earnings will still decline in a bull market, although perhaps to a lesser degree than the overall market.

The rough equivalent of the overall stock market for forex traders is the performance of the U.S. Dollar. Because of the Dollar’s status as the world’s premier reserve currency since the end of the Second World War, the majority of large moves seen in the forex market will either be in favor of or against the U.S. Dollar.

Basically, since the U.S. Dollar often plays the role of market leader, its value will rise and fall against a number of other currencies simultaneously depending on economic conditions in the United States in relation to the rest of the world.

This tends to give the impression of bull or bear markets for all currency pairs which include the U.S. Dollar as the fortunes of the United States rise or fall respectively.

Forex; Alternative to the Stock Market

The forex market has often been the choice for many professional traders who had previously traded in the stock and commodity markets. Some reasons for their switch are rather simple: the forex market offers greater liquidity, longer trading hours and more trading opportunities.

Furthermore, with the advent of forex electronic trading available by connecting to the Internet, in combination with the recently available online forex retail accounts, small investors can now access and trade the multi-trillion dollar forex market that was previously only available to banks and large corporations.

Before the Internet, small traders were largely restricted to trading stocks or commodity futures and options, where retail accounts have, for the most part, always been available.

Also, currency futures were not made available until just after exchange rates began to float in 1972. For many years, currency futures were the only way that retail traders could participate in the foreign exchange market.

The forex market has some clear advantages for traders which cannot be found in other markets such as the stock market. Some of these features that the forex market offers traders compared to the stock market include:


The forex market makes up the deepest and most liquid market on the planet.

Currency trading occurs around the clock by the world’s largest banks and financial institutions and helps ensure that a market maker or dealer will always be available to take either side of a trade.

Conversely, trading in the stock market is limited to certain hours of the day, and liquidity can become almost nonexistent in some of the smaller stocks.

Trading Hours

The forex market remains open continuously from Sunday afternoon until Friday afternoon EST. This means that currency traders enjoy the longest continuous trading hours of any financial instrument.

Stock trading is limited to certain hours of the day, with some highly capitalized stocks which may be traded on overseas markets.


Trading stocks can be quite costly, especially for active traders since commissions can build up significantly.

Trading currencies is considerably less expensive in comparison since most forex dealers only charge a part of the spread instead of charging a straight commission.

This means the cost savings in trading forex over trading in stocks can be considerable.


One of the best reasons to trade in the forex market consists of the amount of leverage a trader can use. Trading in stocks requires 50% of the purchase price, or a 2:1 leverage ratio, while forex trades can be leveraged by as much as a 500:1 ratio.

Because a trade in the forex market represents an exchange of equivalent assets, there is no initial cost in establishing a position. This differs from the stock market where one is actually purchasing an asset.

Fewer Choices for a Trading Vehicle

In contrast to the stock market, where thousands of stocks exist, the lion’s share of trading in the forex market occurs in just eight major and minor currency pairs quoted against the U.S. Dollar and several active cross rates pairs.

This makes choosing a currency pair to trade substantially easier than picking from among the thousands of choices in the stock market.

Portfolio Diversification in Forex Trading

The strategy of diversifying an investment portfolio allows the fund manager to spread risk between various different investment types with the same portfolio. In this way, they avoid having all of their investment “eggs” in one basket.

In essence, if you keep all of your funds invested in similar securities like either bonds or stocks denominated in a single currency, then your portfolio will not be protected against adverse general moves in the relevant markets.

Nevertheless, if you instead diversify your portfolio by placing funds in different types of investment instruments denominated in different currencies, then you will have less exposure to any one security, currency or market.

How Portfolio Diversification Traditionally Works

Using traditional portfolio diversification techniques, investors will often purchase a mixture of stocks and bonds to hold in their investment portfolio.

They generally do this to protect or hedge against the risk of an economic downturn by holding bonds that will continue to pay interest, while at the same time still being able to profit from good economic times due to the probable appreciation of the equities they are holding.

The primary disadvantage of using this strategy arises when economic conditions deteriorate and inflation eats into the investment currency’s value. When this happens, the bond interest received may not adequately compensate the investor for the loss of capital experienced on their equity investments.

Adding a Currency Dimension to Your Portfolio

Although Forex trading is certainly not the same as investing, those involved in investment management might wish to consider adding an extra diversification element to their portfolios in the form of using different currencies.

Basically, given the volatility experienced in today’s relatively free floating forex market, investing in assets denominated in a foreign currency might well be something that could both enhance and protect a portfolio’s value.

Furthermore, according to the goals of an investor, they could even choose attractive fixed income or equity assets from several different countries to add currency diversification and balance to their portfolio.

An alternative for those who need to maintain all of their assets denominated in their local currency would be to exchange just the portion of the portfolio held in cash into a different currency. Ideally, they would choose to switch into a currency that would be expected to appreciate relative to their local currency and which may even provide a superior interest rate return on deposits.

Investing in Currencies

Since currencies can be looked at as the stock of a nation, investors could even elect to hold a diversified basket of currencies. This would allow them to invest in various nations that they expect to show superior growth rates and moderate inflationary pressures.

In general, the currencies of countries which are growing well and offer higher interest rates and low inflation will tend to have a stronger currency that may well appreciate relative to the currencies of those countries that have weak economies, lower interest rates and higher inflation.

For example, with U.S. growth flagging and its interest rates currently near zero, a U.S. based investor well might be inclined to consider alternative currencies to switching their U.S. Dollars into. Furthermore, Australia’s deposit market currently has interest rates of over four percent, and the Australian economy has shown much healthier signs of growth.

Accordingly, the investor who switches from U.S. Dollars to Australian Dollars would benefit from an interest rate differential of roughly four percent on their cash. Also, provided that inflation remains under control in Australia, these factors should eventually lead to a higher exchange rate for the Australian Dollar versus the U.S. Dollar over time as an added investment incentive