If you are dabbling in trading, one of the situations that is bound to give you anxiety is the thought that the market is going through a downtrend. A downtrend typically means that you will not be able to make the profits that you intend, as the market is experiencing a period of general loss.
However, there are opportunities that you can take advantage of if you understand the structure of a downtrend. This means that when the prices are falling, you should still be able to make a profit.
The Structure of a Downtrend
Downtrends are all about waves, and there are two types of waves to watch out for. There are known as impulse waves and correction waves. With impulse waves, the movements in price are larger, whereas with correction waves they are much smaller.
Video: How to Profit from a Downtrend
Typically, a downtrend is not a straight line that simply moves downwards. It is made up a serious of lower highs as well as lower lows, although they are all moving generally downwards from the left to the right of the chart. It is here that it becomes possible to see the impulse waves which are consistently moving towards lower points.
Downward Trends and Reversing
Downward trends are likely to reverse for various reasons. In order to identify when this happens, you need to understand what causes downward trends to reverse. A reverse will occur when the process of moving from lower highs to lower lows is breached in some way.
This means that an impulse wave results in the prices moving upwards, rather than continuing to move downwards. The result of this is that a higher high and a higher low are identified. What this reveals is that the best way to identify whether there is a downtrend or not is to pay attention to the impulse waves.
Short Selling in the Forex Market
There is no end to the trends that are taking place in the market, meaning that you can carry out both short term and long term trends with ease. For short selling in the forex market, you need to pay attention to financial charts, as from these, it is easier to identify trends. When reading them, you should look to see where there are downside impulse waves, as this is where the downtrend usually begins.
Now, you need to look out for the corrections waves, remembering that they will be much smaller than the downward trend. It is when the corrective wave has been identified that you can choose short selling in the forex market. You could also wait to see where the corrective wave has stopped going up, and then allow the price to move sideways. At this point, it will be easier to make a shorter trade.
Making the most profit from a downtrend comes down to the strategy that you have in place. You should know when the best time to exit your trades is, and also learn how to identify a trend.