Recognize And Exploit Uptrends and Downtrends

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Forex Trading Patterns – Uptrends, Downtrends and Flat Lines

In this guide we will teach you about Forex trading patterns, including uptrends, downtrends and Flat lines.

When you practice Forex trading technical analysis you need to be able to read charts of currency prices. In order to predict how the currency will behave, whether it will drop or rise, you need to be able to analyze the Forex trading patterns.

Recognizing Uptrends

An uptrend is a Forex trading pattern that appears as a rise in the direction of the foreign currency price. The sooner you recognize an uptrend, the better you can predict the currency direction, and the more profits you can make. You can also recognize when an uptrend is going to end and be reversed into a downtrend.

In the Forex online trading market there are strong uptrends that last longer, and which you should count more on. One of the best Forex trading strategies is to invest in a certain uptrend, until the currency starts showing some real losses. This means the currency probably reached its peak and is about the go into a reversal downtrend pattern.

Recognizing Downtrends

A Forex trading downtrend is seen when the currency follows a downward direction. The previous explanation on the uptrend can also be implemented for downtrends, as all Forex trading trends act similarly.

Flat Lines

These are Forex trading patterns that occur in between uptrends and downtrends, and point to an equilibrium in supply and demand. Sideway trends follow a horizontal direction, where the price stays relatively constant.

Forex trading patterns are also used in order to set support and resistance levels, which are very useful for technical analysis of charts.

Trading Ranges: Uptrends, Downtrends, Consolidation & Congestion

Stock prices move up and down within what’s called a trading range. Most of the time, they move sideways.

Market prices move in cycles. The name of the game is recognizing these cycles. Extended stock cycles sometimes take years to complete. Within a given cycle, smaller cycles take place over the course of months, weeks, and days. Within a single day, miniature cycles evolve. It’s like a fractal blacklight poster you can make money staring at.

The high points are called peaks and the low points are called valleys (or troughs).Stocks have a tendency to fluctuate between higher and lower price areas in a somewhat predictable, “horizontal” channel, what we’ve been referring to as a sideways pattern. What’s happening is that sellers who are shorting the stock when the price is near the top of the range “cover” their short positions (we’ll go into detail later, but for now understand this means they buy the stock back to close the trade) when it nears the bottom, knowing that buyers will be ready to step in the expectation that the price will reverse to higher prices.

There’s plenty of money to be made in playing stocks trading inside an orderly range, buying the dips and selling the rallies. We recommend this be one of the first techniques you develop a skill at.

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Uptrends

A breakout is the exact point where a stock rises over the valley. To qualify as a legitimate uptrend, the stock price must make a series of higher highs and higher lows.

Uptrends are fueled by greed and euphoria. We say a stock is overbought at the height of a cycle. At this point, the overbought stock starts to sputter, the volume usually increasing, and the bears gain control and drive the price back down.

An uptrend continues so long as the price doesn’t decisively break through the previous low of the trend. When the barrier of the trend low is broken and the uptrend has officially concluded, it often “rolls over” into a sideways pattern.

Downtrends

Sometimes buyers get tired of watching a stock trade sideways and get out of a stock, and if enough traders do this, eventually there aren’t enough of them to support the price, and that’s when short sellers move in. A downtrend is characterized by lower and lower lows being reached. They are broken when the price once again closes above a prior high.

Disinterest manifests itself as low volume, and this can often be at the root of a downtrend. But if the volume is strong and the price is still dropping, look out. The stock in trouble. Panic has set in and everyone is trying to get rid of the stock. What your eyes see will be a long black candle, but what your mind should see is panic. Short sellers and long-term investors will be the only ones sticking around.

A bull trap is a false signal of a reversal in a downward trend. That’s all. They happen, and they’re frustrating. Heads up.

Bull Trap

Consolidation

When stock dutifully moves sideways in a compact, linear fashion, we call this consolidation. The price range indicated by each candlestick should be short, tight, and orderly. There is a tension here caused by buyers and sellers who are at a relative dead heat. The effect is a compression within the price range that is likely ready to explode in one direction or the other.

Whether you find it on your daily or intraday charts, this is a great pattern to come across. We recommend you focus some attention on finding this pattern in the early stages of your development.

Congestion

During congestion, no upward or downward trend emerges, but neither does the price fall into an orderly consolidation. Buyers and sellers are being indecisive about the whether the price should be higher or lower, so the stock appears to behave erratically. Symptoms of the market illness known as congestion, other than indecisiveness, are unpredictable daily price ranges and gaps opening upside one day and downside the next.

Congestion is bad news. You don’t want any piece of it. When you recognize it, stay on the sidelines and wait for a better moment to enter.

Downtrend

What Is a Downtrend?

A downtrend refers to the price action of a security that moves lower in price as it fluctuates over time. While the price may move intermittently higher or lower, downtrends are characterized by lower peaks and lower troughs over time. Technical analysts pay attention to downtrends because they represent something more than a random losing streak. Securities in a downtrend seem to be more likely to continue trending lower until some market condition changes, implying that a downtrend marks a fundamentally deteriorating condition.

A downtrend can be contrasted with an uptrend.

Key Takeaways

  • Downtrends are characterized by lower peaks and troughs and imply fundamental changes in the beliefs of investors.
  • A change in trend is fueled by a change in the supply of stocks investors want to sell compared with the demand for the stock by investors who want to buy.
  • Downtrends are coincidental with changes in the factors that surround the security, whether macroeconomic or specifically associated with a company’s business model.

How a Downtrend Works

A security that changes from an uptrend to a downtrend very rarely makes a single instantaneous changes from one to the other. Instead the price action in an uptrend shows signs of strain and then the downtrend incrementally begins. Both upward and downward trends are marked by their peaks and troughs (also referred to as swing highs and swing lows), and the general direction they appear to be proceeding. The following illustration shows a series of peaks and troughs (peaks are even numbered, troughs are odd).

The dynamic shown in this illustration is similar in nature to almost all trend changes from upward to downward. Though specifics vary in each instance, three characteristics of this change are common:

  1. The price action falls below the most recent trough (shown in points 1-3)
  2. The next peak fails to rise higher than its predecessor (points 3-5)
  3. The downward trend increases its likelihood of continuing (points 5-7)

The first characteristic of a downtrend marks a point in the price action where supply exceeds demand. The number of available sellers and the quantity of the security they want to sell is more than the number of ready buyers and the quantity they want to buy. Somehow market participants have, as a majority, no longer accepted the idea that this security should be priced as high as it is.

The second characteristic indicates the increasing number of market participants that, though previously undecided, have become convinced during the recent peak of price that they must no longer own (or own as much of) the security. The number of sellers increases simultaneously with the number of buyers decreasing.

The third characteristic is usually accompanied by news or new information that confirms the suspicions of those who determined to exit, or no longer consider buying, the security. Even more buyers back away and even more sellers become eager to take profits or limit losses.

Trading Downtrends

The majority of traders seek to avoid downtrends because they are inherently focused on upward trends and trade long only. Downtrends can be found in every trading time frame: minutes, days, weeks, months, or even years. Traders therefore look for ways to identify a downtrend as early as possible. Some traders prefer to trade both long and short, so they identify downtrends for new trading opportunities.

Traders recognize that once a downtrend has been established within their preferred time frame, they should be very cautious about entering into any new long positions. This exacerbates the downtrend by contributing to a reduced demand. Long/short traders recognize the opposite, that this is now their opportunity to profit on the downtrend.

Since short sellers seek to profit from downtrends by borrowing and then immediately selling shares with the agreement to repurchase them in the future. These are known as short positions or short selling. If the asset’s price continues to decline, the trader profits from the difference between the immediate sale price and the lower future repurchase price. Since they add to the price action by entering with sell orders, this too exacerbates the downward trend. Such traders look to profit from at least the next swing lower, maybe more if they can be patient and the trend actually does continue lower.

Often times, traders use technical indicators and chart patterns to identify and confirm downtrends. Moving averages, for example, can be used to identify the overall trend. If the price is lower than a moving average, the stock is likely to be in a downtrend, and vice versa for an uptrend. Technical indicators such as the relative strength index (RSI) or the Average Directional Index (ADX), can also show the magnitude or strength of the downtrend at a given point in time, which can help when deciding whether or not to enter a short position.

Example of a Prolonged Downtrend

The example of the lengthy downtrend in General Electric Co. (GE) stock prices is instructive to review. This price action accompanied a growing awareness that the company’s troubles were deeper than originally anticipated, and that layoffs, spinoffs, plant closings and product cancellations were signaling a sea change in the economic environment—one that GE was not prepared for.

In this chart, the stock makes its final peak followed by the next trough moving lower than the previous trough (as shown in the inset). This lower trough coincides with the moment that supply of stock that investors want to sell has outnumbered the demand that investors have to buy the stock at these prices. This initial sign of weakness (an example of the first characteristic mentioned previously) was not accompanied by widely spread news of the company’s troubles, though investors determined for themselves that the company’s prospects were not as optimal as previously thought.

The lower peaks and troughs that follow mark an extended downtrend lasting more than two years—and during a time when the rest of the market was generally moving higher. Traders that had taken a bearish stance on the stock following the breakdown from the first trough would have found many opportunities for profitable trades. Alternatively, long traders may have locked in their profits at the beginning of the downtrend and re-entered their long position after the stock showed signs of a rebound.

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