The downtrend is similar to uptrend but with a bearish trend that can give us opportunities to short the forex market. A downtrend can occur mostly after the end of an uptrend but it can occur also on consolidated trends too.
The previous article “how to trade uptrend“, explained the uptrend example and how you can trade the uptrend in forex trading. But the uptrend is not an long term trend, so the forex market can change the trend direction anytime.
And in this article, we’ll explain how to identify a possible change in the forex market that could indicate that uptrend will end. We will also show an example of a downtrend and how you can short the fx market on a downtrend.
How to identify and trade the end of an uptrend
We’ll explain the downtrend with an example below.
Now let’s show an example of how you can identify the end of an uptrend with price action combination of a resistance line.
The chart below shows the XAA/USD currency pair on the 4-hour timeframe. The price reached the 1760 level and then continued to go down for more pips. In the 1723 level, we have a strong support zone and also we have the trend line.
The market retested the trendline and then started to create a sideways trend. After the sideways trend ended, the market broke the support zone in 1723.
And the candle was closed by breaking the trendline, which indicates that uptrend has ended. The break of the support zone at 1723 could give us an opportunity to trade the break of the uptrend. It shows that when the candle below the support zone was closed, we could have sold at the close of the candle.
An order opened on the close of the candle at 1710 level, would give us at least 100 pips.
How to identify and trade the downtrend
The downtrend is similar to uptrend, but downtrend creates a bearish trend that can give us a selling opportunity trading currency market. The previous example of “how to identify the end of an uptrend“ showed that the uptrend has ended, but what if the downtrend could have started earlier?
The image below shows the same currency XAA/USD on the 4-hour timeframe that we used as an example of the uptrend. And we mentioned that market reached the price of 1760 and started to go down for some pips. Then the currency price after retesting the support and the previous uptrend trend line broke the support at 1723.
Price now it’s at the support zone of 1723 and we can see that price is retesting the previous support zone. This previous support zone is acting now as a resistance zone. And the break of the resistance zone at 1723 could end the downtrend. But the downtrend can continue still if the price doesn’t break the resistance zone.
The next movement with a break of the trend line and the resistance could give us a buying opportunity. The continuation of the downtrend by not breaking the resistance and if the trend line doesn’t break too would be a great opportunity to short (sell) the market.
As a summary, downtrend it’s used to spot selling opportunities in the market. A downtrend can be identified using technical analysis tools such as trendlines. With trend lines connected to the wicks of the candles, you can spot opportunities to short the market and make money in the financial market.
The downtrend can occur on different time frames like the hourly chart, daily chart, weekly chart, etc. An uptrend forms with higher highs and higher lows but a downtrend form lower highs and lower lows.
The examples we give on our blog are based on our technical analysis. But you as a trader should always trade according to your technical analysis and fundamental analysis.