Uptrend and Downtrend: What They Are and How to Trade in Each Scenario

Downtrend trading strategy

Cory Mitchell Updated August 04, Most people seek out investments where the price is rising, or about to rise. This style of trading attempts to profit from an uptrend in the price.

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Yet money can also be made when asset prices fall, called a downtrend. This is accomplished through short-selling. Being able to spot a downtrend saves you money--it tells you to get out of assets you previously purchased, so all the profits aren't eroded by the falling price.

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This article will focus on the price structure of a downtrend, what events cause downtrends to reverse, and how to trade a downtrend. Price Structure of a Downtrend A downtrend is composed of two types of price waves: price action binary downtrend trading strategy and correction.

This is how trends are created, and how the price makes progress in one downtrend trading strategy or the other. If there is an impulse wave down, followed by a corrective smaller wave up, then the price has made overall progress to the downside.

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The downtrend continues as long as impulse waves occur to the downside and smaller corrective waves occur to the upside. The attached chart shows a downtrend. What Reverses a Downtrend If a downtrend is a sequence of lower highs and lower lows--or impulse waves to the downside and smaller corrective waves to the upside--a reversal is when those criteria are violated.

If the price makes a higher high or higher low, that signals the downtrend is in trouble.

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For example, the downtrend is in trouble if an impulse wave occurs to the upside and is followed by a smaller down wave higher high, higher low. Trend traders adapt to new information as it comes available. The price may move into a downtrend, give a signal the downtrend is in trouble, but then revert to a downtrend again.

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Or the price could move sideways or into an uptrend. No matter what the scenario, isolating which direction the impulse waves are moving gives you the trend direction.

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If up and down impulse waves are the same size, then the price is moving in a range sideways. When impulses are to the downside, favor short-selling on upside corrections. When impulses are up, favor buying on the corrections lower.

Trading a Downtrend Trends, both up and down, occur across all time frames and all assets. The same trend trading concepts apply when looking at a one-minute chart or weekly chart. If viewing a one-minute chart, trades are taken to capture small trends lasting hours rareminutes, or even seconds.

On a weekly chart, traders seek trades that could last months or years.

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Once a downside impulse wave occurs a move lower larger than the prior up waves it's possible a new downtrend is starting. Therefore, when a correction to the upside develops it likely won't rally all the way up to where the impulse wave started downtrend trading strategy corrective waves are smaller.

Plan on short-selling during that corrective wave, based on the assumption that the price will have another impulse wave lower. There are multiple techniques for entering a trade during a corrective wave. Place a stop loss on each trade to manage risk, and have an exit strategy for taking a profit. Therefore a target, in order to exit a short trade with a profit, is placed near the former low. In a very strong downtrend big impulse waves the target downtrend trading strategy placed below the prior low.

In a weak downtrend impulse waves barely bigger than corrections the target is placed just above the prior low. Final Word on Downtrends A downtrend occurs when larger waves impulses occur to the downside, and smaller waves corrections occur to the defining trend line.

Simple Trend Reversal Strategy – Downtrend to Uptrend

During downtrends consider short-selling during the correction--technical tools and strategies help isolate when a correction may be ending. Utilize a stop loss order to control risk, and also plan for how to exit a profitable trade, likely using a price target.

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