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The terms bull and bear have been in the trading lexicon for many years. Both terms apply to people and market trends. A bull is a market participant who expects or wants the market to move higher, but it’s also part of an expression that explains an up market (a bullish market). A bear, on the other hand, is a person who expects the market to decline, so bearish indicates a declining market. But where did these terms come from?

Although there’s some debate about the origins of the two terms, they might be attributed to a Thomas Mortimer, who wrote about the precursor to the London Stock Exchange in the late 1700s. He wrote that a bull bought stocks without putting any money down with the hope of selling at a higher price before having to settle up. According to Mortimer, a bear sold stock they didn’t own without putting up any money, also hoping to exit the position by purchasing the shares back at a profit before being forced to settle up.

A trader might study old candlestick charts and notice that when a security’s closing price is much higher than its opening price, it seems to open higher the next day — a situation commonly referred to as a gap opening. That trader can buy the security at the close of the day and place an order to sell the next day, thus making a profit. Figure 2-3 provides a clear visual example of a gap opening.

FIGURE 2-3: Two candles showing a classic gap opening.

Just by studying past price action on old candlestick charts, the trader in this section’s example can predict a small piece of the future and use it to turn a profit. History does repeat itself in markets and trading, and you can use this repetition to your advantage by considering past candlestick charts, which can be a cinch to read. But keep in mind that as with all aspects of technical analysis and investing, past results don’t ensure future returns.

At the very least, be sure to pay attention to price gaps because they indicate an increase in volatility in the price of a security. When there’s an increase in volatility, there’s an increase in trading opportunity. Many other types of patterns, including those that incorporate candlesticks, reappear and may be profited from.