What Is an Downtrend?
In trading and investing, a downtrend is a period of sustained price decreases. It is characterized by a period of successive lower highs and lower lows. The uptrend is active as long as price does not begin making higher highs and higher lows.
As you probably know, there are two basic types of trending price action, uptrends and downtrends.
In essence, a trend is a duration of time in which price moves in one general direction. Given that price can only ever go one of two directions—upward or downward—assets tend to remain in longer-term downtrends or uptrends most of the time.
However, this increase or decrease does not necessarily have to be continuous.
In fact, it usually is not.
How to Recognize Downtrends
On a fundamental level, downtrends are quite simple.
They are created when selling pressure exceeds buying pressure over a prolonged time span. However, there are usually periods of upward price action within a downtrend. These are known as rallies. Likewise, there can also be periods of downward price action within a downtrend, otherwise known as pullbacks.
This is similar to the way a downtrend can exist within a bull market and an uptrend can exist within a bear market.
A simplified way to conceptualize this:
A bear market is to a downtrend what a downtrend is to a pullback.
How you would delineate each of these is relative to the timescales you’re trading on (though bear and bull markets do have semi-standard definitions).
Furthermore, there may be periods where price remains relatively the same. This “sideways” price action is referred to as consolidation. During this phase, price usually remains range bound within a price band, oscillating between shorter-term support and resistance.
Such periods can last any amount of time and may contain within them any number of shorter-term uptrends or rallies. During a downtrend, consolidation periods that resolve to the downside are considered bearish continuations and ones that resolve to the upside are considered bullish reversals.
One of the key skills of traders is the ability to understand which of these phases the market is in.