Trading Terms – Bearish, Bullish, Hawkish and Dovish
- Trade Magnates Team
- Jun 6, 2019
- 4 min read
Do trading terms sometimes make you wonder if you are an expert trader or not? Do they make you sometime question your knowledge and understanding to the market?
What Do Bullish and Bearish Mean? How Can I Trade Bullish Their Sentiment? What Do Dovish and Hawkish Mean? How Can I Trade Their Sentiment?
If you have these questions in your head, then you are probably looking to know more about specific terms and we have put together some of the questions related to trading terms to help you understand their meaning and how you can trade them.
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. Bullish: When traders believe that the price of an asset will rise. Bull markets means rising prices. Bearish: When traders believe that the price of an asset will fall. Bear markets means falling prices.
How Can I Trade Bullish & Bearish Sentiment?
The most convenient way to do trading these terms is to follow the markets. Invest in rising and falling prices during bull/ bear markets and when traders are bullish/bearish about an asset. You need to decide on the direction, and you need to be up to date with Market Trends.
How Can I Predict or Know Market Trends?
Read the news. The news is a good source to understand how traders feel. Depending on the market conditions and the news affecting the markets, you will be able to tell which direction the market will go.
Use technical indicators or technical analysis. 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. Technical indicators such as oscillators, the Relative Strength Index (RSI).
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 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 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.
How Can I Trade Dovish and Hawkish Sentiment?
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. 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.
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.
Summary
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.
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