I usually like to provide examples of trades that go short as well as long, bullish as well as bearish, show resistance as well as support, and downtrending as well as uptrending.
Many Forex trainers just say “just flip everything upside down and it’ll work the other way…” We learn by examples, so I try to include examples of concepts both ways. You may have noticed that feature of this blog 🙂
Yesterday, I explained about uptrend examples of trends and trendlines. As an appropriate follow-up, I’m going to apply the same idea to give you examples of downtrends.
Finding Your Inner, Outer, and Long-term Outer Trendlines in a Downtrend
A downtrend (also called a downtrend price swing) is the exact opposite of an uptrend price swing.
In this case, the swing starts at a high and ends at a low. The market is making lower highs and lower lows as prices decrease overall.
The downtrend starts high and ends lows.
If you have identified that the market is in a downtrend (the market is making lower lows and lower highs), you should draw all three of your trendlines before making a trade. Generally speaking, you will draw a downward trendline across the levels of resistance (highs) as long as the market is making lower lows and lower highs.
To draw the inner downward trendline, locate the last two levels of resistance (beginning from the current market price at the right of the chart) and draw your trendline between those two levels, extending it forward and down to the right.
Remember that if the market is no longer making lower lows and lower highs, then the market is no longer in a downtrend and you will need to identify a new trendline. This is important to recognize because it could signify a trend reversal.
To draw the outer downward trendline locate all of the levels of resistance on your chart, beginning from the left side. Draw your trendline across those levels of resistance, extending it forward and down to the right.
To find the long-term outer downtrend you will need to look at a longer time frame, as you would in identifying the long-term outer uptrend. For example, if you locate your inner and outer trendlines looking at 5-minute candles, switch to a 60-minute candle chart to find the long-term outer downtrend.
When the inner trendline is broken it is likely that the market will move to the outer trendline. This holds whether the broken trendline is the inner trendline (the market would then move to the outer trendline) or the outer trendline (the market would then move to the long-term outer trendline).
Notice how there are a fan of three trendlines moving down?
Trading Trendlines in a Downtrend
To trade an inner, outer, or long-term outer downward trendline, sell when the market hits the trendline, making sure to set your protective stop loss order at the last appropriate level of resistance.
As with an upward trendline, the inner, outer, and long-term outer downward trendlines may converge. This offers you a double-strength signal. In this case you have two good reasons to believe that the market will bounce.