DowntrendYou can make money from an uptrend or a downtrend in trading.
Downtrends tend to move faster than uptrends, which is why you will find some traders who opt to only short sell assets in order to capitalize on the quick price action.
Many kinds of research show that financial instruments can trend more than 30% of the time. The rest of the time, the active moves sideways.
Do you want to know how to identify and trade a downtrend?
In this post, we discuss what a downtrend is, how to spot and trade them.
What Is a Downtrend?
A downtrend is moving of price action in an asset lower over some time and is most recognizable by prices creating lower lows and lower highs.
What you need to know is that a downtrend is composed of two types of price waves. They include:
-Impulse
-Correction
For example, if the asset price was 0.0024, then drops to 0.0014, then rallies to 0.0020 and again falls to 0.012. These price movements will create a price wave. What you need to know is that Impulse price waves are larger (0.0024 to 0.0014), while corrective waves are much smaller 0.0014 to 0.0020.
Trends form when the asset price makes progress. It can either be in one direction or another. If the impulse wave moves down, followed by a corrective wave up, it means that the asset price has made a downside move.
The downtrend will continue as long as the impulse waves down and corrective waves up in trading.
Key Characteristics of a Downtrend
Several things characterize a downtrend which is easily recognized in charts as you can see below:
Lower Peaks and Troughs
Lower peaks and troughs characterize downtrends with lower lows and lower highs taking place as you can see in the chart above.
It’s also important to note that trends can form in different time frames. You can have intraday trends as well as macro trends on the daily and weekly charts.
News Catalysts
News catalysts is another characteristic that can push asset into a downtrend.
Increase in Market Participants
When the asset price goes downs, the number of sellers increases, which means supply exceeds demand. The increase in market participants who are now convinced that the declining asset price is temporary will begin to rise. As such, the number of customers buying the assets increases while the number of sellers decreases.
How to Trade a Downtrend
A downtrend occurs across all assets and time frames. Traders can trade them over longer-term time frames such as daily, weekly, and monthly or short-term charts like a tick and one-minute charts. What you ought to know is that the same trend trading concepts apply whether the trader is looking at a daily, weekly, or monthly chart.
Tools
You can detect a downtrend using technical and fundamental analysis using volume and volatility as well.
Use trend lines during trend analysis. By creating a trend line over an asset chart’s high pivot points or under pivot low points. This is a great visual indicator of resistance and support. It also offers a clue to the direction of the price change and speed.
Short sellers profit from downtrends by borrowing then selling the assets immediately with an agreement to buy them in the coming future. Also known as short selling, traders benefit from the difference between the lower future price and current sale price.
If you are planning on short selling, do so during the corrective wave. Using Fibonacci retracement levels will isolate sections where correction stops and reverses. You can also wait for the correction to stop rallying.
By doing so, you allow the price to move sideways, and when it starts to drop, make a short trade. lace a stop loss on every trade to manage risk. Remember, to exit a short trade with a profit the prices need to be lower than what you sold them for.
Trading Tips
Look for prices to reach previous highs but are not able to breakthrough. This is a good indication that buyers are no longer seeing value in the asset and we could be setting up for a move lower.
Use previous highs as a stop location.
Look for a break in previous lows to confirm the downtrend.
Profits should be taken as prices flush below previous lows and stops should be adjusted to the last previous high.
Final Thoughts
There are a couple of mistakes you should avoid.
Firstly, never fight the overall trend on the higher time frames. If you do so, you may find yourself in a downtrend with no reason to buy. Secondly, never trade too much. Trends are temporary. Even if they are strong or have a potential for making profits, never risk too much on any one trade.
This is true, especially if you have a small account or just starting. Don’t be greedy. What we recommend is to start small and scale-up. Starting with a small deposit, you gain crucial knowledge and experience. As such, you will be confident about increasing your trading sizes.
Lastly, take some time to learn. To be successful in trading, you need to keep learning. Stay on your toes at all times. By keeping abreast of what is happening in the market. Commit yourself to learn and surrounding yourself with more experienced traders to do that.
If this post has 300 likes, I will make a post about the uptrend
Best regards EXCAVO
