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Trading In Bullish Markets: Finding Reasons to Be Bullish

Trading In Bullish Markets: Finding Reasons to Be Bullish

Look to these factors when looking for reasons to be bullish.

Most investors are familiar with the phrase “bull market”, which is a term typically used to describe a period of time when the major stock market indexes—and the majority of stocks—experience an extended and meaningful advance in price. To be “bullish” on the outlook for a given stock, index, ETF or other asset means that you are comfortable holding existing positions while possibly looking for other opportunities to buy stocks and benefit from a rise in price.

Honing in on a potential reason

Before assuming a bullish position in any security, it’s important to have some identifiable reason why you believe it is a worthwhile idea to do so rather than simply relying on a whim or a passing notion. A trader should be able to point to some concrete reason why they believe that the price of a given security will be propelled to higher ground. Many look at several different factors for those potential reasons.

Technical factors

A trader might identify a security that is already in an established uptrend and figure that the trend is likely to continue. As a result the trader will enter a bullish position and hope to “ride the trend” as long as the trend appears to remain in force. Another trader may see a stock that has been beaten down sharply and decide that at some point the selling has been overdone and assume that the stock price is due to “bounce”. Other traders may look at chart patterns and/or momentum indicators to determine when the time is right to enter a bullish position.

Fundamental factors

Many traders focus on the performance of the underlying company when considering buying stock. These traders tend to look for either a company that is performing exceedingly well in terms of growing its earnings and sales, or for a situation where they believe that the stock is trading below the implied underlying value of the company itself. In either case, these traders examine individual companies’ financial statements to determine if the stock is a buy based on their own preferred growth or value-based criteria.

Seasonal factors

Some traders and investors believe stock market seasonality has merit and use this type of information to aid in their analysis. While this apparent seasonality can offer insights, like any single piece of research, it should not be the sole consideration for investment. The overall stock market has displayed a historical tendency to perform better between November and April than between May and October. As a result, some traders may choose to be more or less active in pursuing bullish positions depending on the time of year.

Sector strength

When the underlying fundamentals for a given market sector (technology, financial, utilities, etc.) change for the better it can take a long time for this to be recognized by the majority of investors and for the positive effects to play out. As a result, many traders will pay close attention to the fundamental and technical action of various market sectors and/or industry groups in an effort to forecast areas where above average and/or persistent price strength may be likely to occur.

Other factors

Some traders use a variety of other miscellaneous factors to attempt to identify indicators that may drive bullish investments. Among these may be dividend yields, stock buybacks, lesser known technical analysis methods such as Elliott Wave or Gann, and simple “common sense”, which alerts them to a company that they may be aware of (perhaps one whose products they use regularly or one that is a leader in the industry in which they work) that they believe has above-average investment prospects.

Combining different factors

Rather than relying on one factor, some traders believe that, by combining a variety of factors such as those listed above, they can improve their chances for success. For example, a trader can first identify a sector they’re bullish on and then identify an undervalued company within that sector using fundamentals, then use technical analysis to find the right time to establish a long position.

When it comes to identifying a catalyst that may drive a perceived bullish security higher, there is no one best factor. As a result, it is not so much which factor or combination of factors a trader chooses to use that matters most, but rather, how consistently he or she applies those factors and how effective those factors have proven to be in the past. 

Summary

One of the biggest mistakes that traders make is to buy something just because it “seems like the right time” to do so. For traders seeking long-term success, one litmus test they should consider each time they plan to buy a security is to spell out exactly what factor or set of factors has led them to take action at this time. If time passes and the factors that led to the trader’s bullish view are no longer present, the decision to maintain the position should be reevaluated. This method can help a trader to become more consistent and decisive when it comes to making investment and trading decisions.

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Important Disclosures

Schwab does not recommend the use of technical analysis as a sole means of investment research. 

The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern or investment strategy.

Past performance is no guarantee of future results. 
 

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