downtrend

Downtrend is a price action condition in which the market moves lower over time. In financial markets, a downtrend is typically identified by a sequence of lower highs and lower lows, producing an overall downward slope on price charts. Downtrends can occur over any time frame and across asset classes, including stocks, bonds, commodities, and currencies. They may appear as short-term declines or as longer-term moves lasting weeks, months, or years.

Identification and confirmation: Traders draw a downward trendline by connecting successive highs and expect prices to stay beneath it. Technical analysts also watch moving averages; a price below a downward-sloping average (for example, the 50- or 200-day) is often read as a downtrend. Momentum indicators such as RSI below 50 or negative MACD can support a downside bias, though they are not definitive.

Implications and strategies: During a downtrend, market participants may favor selling or implementing short positions, and risk management typically emphasizes limiting losses with stops and position sizing. Some traders attempt to ride the trend by following it, while others wait for signs of a trend reversal before buying. It is common for brief rallies to occur within a downtrend, known as counter-trend bounces.

Limitations and context: A downtrend is not a guarantee of continued losses; shifts in fundamentals or sentiment can reverse it. A prolonged downtrend lasting months or years is often called a bear market, while shorter downtrends can occur within sideways or uptrending markets. Trends can fail and past performance is not indicative of future results.