Downtrend on stock market charts

Downtrend is an integral part of market behavior. The bear market periods are common but they are more violent and offer more volatile moves. You can find many best trading opportunities to make huge amount of money during sell-offs and panic movements.

And even in rising or neutral market situation when major indexes are moving sideways in wide trading range you could find some shares that are weak and are trending down.

You as a profitable trader will want to identify stocks in bearish trend to find possible candidates for short trades. You must be able to identify downtrend because it helps you to make more profitable trades.

How to identify downtrend on charts

Look for these indications on a chart during my trend analysis to identify this type of trend:

  • Price is declining
  • Corrections (pullbacks) are not as strong as moves down
  • There are lower highs (LH) and lower lows (LL) on the chart
  • Volume during declining periods is higher than during corrections

Note them all on this example:

You can use moving averages to obtain additional hints for reading a chart easier.

  • Important 50EMA works as declining resistance which stops any rising correction
  • Both averages are in correct order; shorter 20EMA is under a longer 50EMA.

What is good trading strategy for such bearish situation

There are several options how to trade in situation of declining prices. First you have to identify what is prevailing global trend. Are we in bull environment or in bear situation?

In a bear market you can safely select many picks to trade using short sell trading strategies. Bearish breakdowns and bearish pullbacks – both work well in this environment.

When indexes are in sideways movement, then you can also trade both direction, including short-sell trades. The best way is to find bearish picks that present the biggest relative weakness.

Short selling in a bull market is tough and you should be careful with bearish stock trading strategies. You should implement very conservative risk and money management rules. Select the weakest stocks you can find into your short sell trade watchlist.

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