Glossary
Downtrend
A series of lower highs and lower lows in price, showing that sellers have the upper hand.
A downtrend is a period in which a security's price keeps making lower highs and lower lows. Each rally stops short of the previous one, and each decline goes further. That stair-step pattern is the plainest sign that sellers are more motivated than buyers, and it is the opposite of an Uptrend.
How to identify one
Traders use a few overlapping tools:
- Swing points. Mark the peaks and troughs. If every new peak is below the last and every new trough is below the last, the trend is down.
- Trendlines. A Trendline drawn across two or more falling peaks acts as a ceiling; rallies that stall there confirm the trend.
- Moving averages. Price below a falling Moving average, or a shorter average below a longer one, is a common filter.
What ends a downtrend
The simplest definition of a change is a break in the pattern: a low that holds above the previous low, followed by a rally above the last lower high. Even then, the stock may only move sideways for a while before a new uptrend, if any, begins. Short, sharp rallies inside a downtrend are common, and some turn out to be a Dead Cat Bounce.
Why it matters
The trend is the backdrop for every other signal. An oversold reading or a bullish candlestick means less inside a strong downtrend than at the end of one. Timeframe matters too: a stock can be in a daily downtrend within a longer weekly uptrend, so it helps to say which Timeframe you mean.