In the market, you will find that stock prices move in one of three directions: up, down, and sideways. No other movements are possible.
The opposite of an uptrend is known as downtrend, when a security is making a series of lower highs and lower lows. Multiple lower lows and lower highs makes a downtrend.
Instead of lower lows and lower highs, many technical analysts prefer to say lower peaks and troughs. A peak refers to the highest point and a trough is the lower point.
Downtrend starts when an uptrend starts gasping for breath as buyers are not willing to pay higher prices. At that moment sellers step in to take down the market. In a downtrend, the overall direction of the price movement of a financial asset is downward.
Many of these sellers are previous buyers who might have participated in the uptrend. Others are short sellers, who bet for the downtrend to make profit from the drop.
As long as the stock or asset is making these lower lows and lower highs in price charts, the downtrend is considered to be intact.
Downtrend considered to be over when prices close above a prior high in the downtrend.
How to trade a downtrend market
After identifying the downtrend, traders decide whether to follow the present direction of the stock / market or to wait for a rally or to stay on the sidelines.
The challenge is identifying when the trend might end.
Technical analysts use trend lines to identify a downtrend and spot possible trend reversal after its break.
Trend line is one of the simple indicators drawn to know when a prevailing trend is about to end.
Downtrend provides an opportunity to make profit from falling asset prices.
Selling or going short at the beginning of a downtrend and riding it until it ends is the easiest and most profitable strategy.
Selling when a stock breaks the consolidation level in a downtrend and buying back when it starts to rally is easier said than done. It’s a challenging strategy you have to master, if you want to be a successful day trader.
Most traders use 3 classic continuation chart patterns to trade a downtrend market. They are Flag, Pennant and Wedge chart patterns.
In the market, traders always look for prices to reach previous highs but are not able to break through. This is an indication that bulls are no longer interested in buying at that level. Therefore, stock prices might move lower until they get buyers. They also closely watch previous lows to confirm the downtrend.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
