Bull Market Trading Strategy —Backtesting and Practical Example

As a stock market trader, you must have been conversant with the phrases like a bull, a bull run, and a bull market. Those are phrases used to describe buying sentiment in the market. But what actually does bull market trading strategy mean?

Bull market strategy refers to the methods and techniques employed by traders and investors to benefit from a bull market. This includes entry, exit, trade management, and risk management strategies traders use to gain the most benefit from the market during a bull run.

In this post, we take a look at some bull markets in history and at the end of the article, we look at a bull market trading strategy.

Related reading: Are you looking for other bull market trading strategies? (We have plenty more)

What is a bull market?

A bull market refers to a market condition where the prices of assets are rising steadily. Since the prices of many assets rise and fall all the time, the term “bull market” is typically used to describe an extended period — months or even years — when the prices of securities are in a sustained uptrend. Although commonly used to describe the stock market, a bull market can also be used to describe other asset markets, such as the commodity, bond, foreign exchange, and real estate markets.

There is no standard definition for a bull market, as regards the value of price appreciation. However, in the stock market, one commonly accepted definition of a bull market is a period, lasting at least six months or more, when any of the broad market indexes, such as the S&P 500 Index or the Dow Jones Industrial Average (DJIA), rises by 20% or more, from the low of a preceding 20% decline (bear market).

For many retail and institutional traders, a simple way to identify a bull market is to use the 200-day moving average of the S&P 500 Index. When the 200-day moving average of the S&P 500 is sloping upward and the index is trading above it, the market is considered to be in a bull market. We have covered the 200-day moving average extensively in a separate article. Please read here for how to use the 200-day moving average strategy in trading.

A bull market is marked by high levels of optimism, investor confidence, and expectations that strong results should continue for an extended period of time — what traders and investors call bullish sentiment. One thing is clear though: it is difficult to predict consistently when the trends in the market might change, as herd mentality and speculation may sometimes play a large role in the markets.

Note that a bull market always follows a bear market; however, there may be a period of accumulation in between. Also, a bull market is not considered to have ended until another bear market is confirmed, but again, there may be a period of distribution in between. According to Richard Wyckoff, the market moves in cycles — accumulation, a bull market, distribution, and a bear market.

What causes a bull market?

There is no one cause for a bull market, but it tends to come during a period of economic prosperity, evidenced by strongly growing gross domestic product (GDP). This often coincides with periods of reduced unemployment rates and increasing corporate profits. With more corporate profits, companies employ more people and increase wages. As a result, there are more people earning more money than they need for immediate needs, which leads to more savings and investments — as more people have sizeable savings, they tend to invest them in the stock market.


With more people investing in stocks, the demand for stocks increases, while supply reduces as many people won’t have the need to cash out on their stocks and may not be willing to sell. In essence, supply will be weak while demand will be strong. In a bull market, investors are more willing to take part in the (stock) market in order to make profits — many will be eager to buy securities, while few will be willing to sell. The increased demand for stocks and reduced supply drive prices higher.

In addition, there is increasing investor confidence, optimism, and high expectations of positive results — the market tends to have an overall positive tone. Also, there is an increase in the number of companies issuing their stocks to the public for the first time (IPO). Some of these factors are easily measurable, but others are not. For example, unemployment rates, wage increases, GDP growth, and corporate profits are measurable. However, other factors, such as investor confidence and the general tone of the market, may be difficult to quantify.

What does a bull run mean?

A bull run means the same thing as a bull market. It refers to an extended period in the market when overall stock prices are on the rise. While there’s no formal metric that defines the term, one common rule of thumb is to consider a broad market index gaining a 20% increase from the most recent low to be in a bull run. In a bull run, the market show signs that prices will continue to grow, as there would be fear of missing out (FOMO) and investors tripping over themselves to get a piece of the pie.

Emotions, especially greed, drive the market during a bull run, making it difficult to predict, with reasonable certainty, how long the bull market can last. Greed and FOMO can keep pushing prices higher for a long time, even when there are no fundamental reasons for such moves. In this state, stocks tend to get extremely overvalued — a recipe for a market crash.

What are some bull market examples?

There are many bull markets in the history of the U.S. stock market, but we will only consider the ones from 1990 to date.

1. The Bull Market of 1990-2000

The Dot-Com Boom of the 1990s focused more on tech stocks, but it trickled down to other sectors. The bull run was triggered by many factors: the end of the Cold War with the US coming out on top, the end of the Gulf War, and more importantly, the emergence of the internet (the dot-com era).

With investors sensing the huge potential in the internet and technology industry, they kept on investing throwing money into the market, especially on tech and internet stocks. From October 1990 to January 2000, the S&P 500 gained about 417%, while the Nasdaq composite gained 582% from 1995 to 2000. The bull run later turned into a bubble, with stocks becoming irrationally overvalued, which later burst in the early 2000s. The dot-com burst could be a great learning experience for traders!

2. The Bull Market of 2002-2007

This bull run came as a result of ease of access to funds and unchecked activities of the financial institutions. Following the Dot-Com Burst, the Federal Reserve lowered interest rates. With low borrowing costs, many Americans were able to buy homes (often without a down payment) — the housing market was experiencing a bubble.

Moreover, investment banks created complex financial derivatives, which they sold to investors to offset the mortgage risks while pocketing huge profits for themselves. The S&P gained about 102% (mostly in the financial sector) from October 2002 to October 2007.

When the Fed started increasing interest rates, homeowners defaulted. Those mortgage-linked financial derivatives became worthless, leading to the collapse of some big investment banks and the beginning of the great recession.

3. The Bull Market of 2009-2020

This is the longest bull market in the history of the U.S. stock market. It was driven by a combination of factors, including bailouts, economic stimulation, low interest rates, steady economic growth, and record corporate earnings.

The S&P 500 index gained over 546% from the great recession low. Many tech stocks, such as Apple, Amazon, Google, Facebook, and Microsoft gained a lot more and became the main drivers of the market. The bull run eventually ended with the emergence of the Covid-19 pandemic and the accompanying economic lockdowns.

4. Post-Covid-19 Bull Market (2020-2022)

Following the 33 days of decline that became the Covid-19 bear market, the government responded with direct relief payments to Americans. With a lot of free money in the hands of individuals, much of it ended in the stock and crypto markets, driving a crazy bull run.

Let’s now turn to some specific bull market trading strategies:

Bull market trading strategy (backtest and example)

In a previous article, we published a bear market trading strategy. Let’s look at the opposite type of market strategy: a bull market trading strategy. We backtest the S&P 500 (SPY) in this article.

Because all our backtests are 100% quantified, we need to define a bull market. How can we define a bull market? We do it the simple way: we use a moving average to define if we are in a bull or bear market.

How many days should we put in the moving average? We use the 200-day moving average strategy. If the close is above the 200-day moving average (we use a simple moving average) it’s a bull market. If the close is below the 200-day moving average, it’s a bear market. Pretty simple, but in trading, you need to make it simple.

Does the 200-day moving average strategy work? Yes, we have written articles about this moving average several times before:

Such a moving average helps you get out of a major bear market, while it lets you “ride” the long-term bull trend. The stock market spends most of the time above the 200-day moving average.

But we need more than a moving average – this is not a moving average strategy. Because the stock market over the last three decades has shown a high degree of mean reversion and has had a fantastic tailwind from the overnight edge, we look for entries after a short-term pullback. This means we need to define a specific pullback criteria. How far should the S&P 500 (SPY) drop before we enter a trade?

We add a Rate of Change indicator strategy for this purpose and make the following additional trading rule for our bull market trading strategy:

When the 5-day RSI indicator of the 5-day Rate of Change indicator is below 20, we enter at the close. We have not curve-fitted the parameters and the settings are not optimized.

We also need a trading rule for when to sell:

We sell when the 5-day RSI of the closing price is above 40.

Now we have all the trading rules needed for our bull market trading strategy:

  1. The close must be above the 200-day average.
  2. The 5-day RSI indicator of the 5-day Rate of Change indicator must be below 20.
  3. We sell when the 5-day RSI is above 50.

The trading rules and settings are simple. How has our strategy performed? We put the strategy into Amibroker and backtested it. This is how our equity curve would have performed:

Bull market trading strategy backtest and performance

The equity curve looks good, but our bull market strategy doesn’t trade often. There are just 103 trades since the inception of SPY in 1993, but the average gain per trade is a pretty solid 0.99%. The win rate is 82%, and the compound annual growth rate (CAGR) is 3.3%. The latter is much lower than buy and hold which is at 9.8% (including dividends reinvested), but considering our trading strategy is invested only 5% of the time, we think the strategy’s trading metrics are pretty solid.

All in all, we are pretty pleased with such a simple and profitable trading strategy. If you also add a bear market trading strategy to make a portfolio of trading strategies, you might have good trading strategies in both bull and bear markets.

Other bull market trading strategies

This website is all about quantified strategies. Since we first started writing we have made hundreds of trading strategies. Some are free, but the best ones we charge a small fee for. Please click here for an example of a free and profitable trading strategy.

You can find all our paid products in the Quantified Strategies Shop – including many relevant courses.

Amibroker and plain English code

If you want the Amibroker code for the bull market trading strategy, we have made it available to you together with the plain English code. You can order it together with all the code for our other free trading strategies – more than 125 different trading ideas.

Bull market trading strategy – ending remarks

The good thing about short-term trading, unlike a long-only buy and hold strategy, is that you can make money whether it’s a bull or bear market. This article only looked at a bull market trading strategy but combined with a bear market strategy you can develop potentially high risk-adjusted returns not dependent on the market direction. However, it requires some work, backtesting, and patience from your side in developing the trading strategies!


What is a bull market trading strategy?

A bull market trading strategy is a set of methods and techniques that traders and investors use to profit from a rising market2. It involves identifying the entry, exit, trade management, and risk management criteria for each trade3.

How do you define a bull market?

There are different ways to define a bull market, but one common way is to use the 200-day moving average of the S&P 500 Index56. When the index is trading above its 200-day moving average and the moving average is sloping upward, the market is considered to be in a bull market7.

What are some examples of bull markets in history?

Some examples of bull markets in history are the Dot-Com Boom of the 1990s, the Housing Boom of the 2000s, the Post-Recession Boom of the 2010s, and the Covid-19 Recovery Boom of the 2020s.

What are some factors that drive a bull market?

Some factors that drive a bull market are economic prosperity, low unemployment, high corporate profits, low interest rates, high investor confidence, and high demand for stocks.

What is the bull market trading strategy presented in this article?

The bull market trading strategy presented in this article is based on two indicators: the 5-day Rate of Change (ROC) and the 5-day Relative Strength Index (RSI). The strategy enters a long position when the 5-day RSI of the 5-day ROC is below 20 and exits when the 5-day RSI of the closing price is above 408. The strategy only trades when the S&P 500 is in a bull market as defined by the 200-day moving average

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