Commonly, traders invest during the price uptrend or when the price is rising, or about to rise. But, the truth is you can also gain profit when the prices fall or a downtrend. Your pace in spotting downtrend significantly affects the amount of money you can gain.
It tells you to get out of your current asset before it sinks along with the falling price.
Price Structure of Downtrend
A downtrend consists of two price waves, the impulse, and correction. The example of price waves is when a stock drops from $10 to $9.50, then rallies to $75, then fall again to $9.30.
In impulse waves, the movement is larger, like $10 to $9.50 or $9.75 to $9.30. On the other hand, the corrective wave movement is smaller, like 49.50 to $9.75.
These price waves create a trend. An overall downside happens when there is an impulse wave down, then followed by a corrective wave up.
Downtrend happens when the impulse waves continuously happen to the downside, while the corrective waves happen to the upside.
Defining Reverses a Downtrend
Since the downtrend sequence consists of impulse waves continuously happen to the downside accompany by the smaller waves to the upside, then a reversal downtrend happens when the sequence is violated.
The signal of the troubled downtrend is when the impulse wave occurs to the upside, then a smaller down wave follows it.
There is a possibility that the price of an asset move into a downtrend, gives a signal of a troubled downtrend, but then revert again to the downtrend. Or that price can rally move into an uptrend.
In every scenario, you can get the trend direction by isolating the direction in which the impulse waves can move.
When the impulse is heading to the downside, you better do short selling on the upside direction. Conversely, when the impulses are going up, then, you better buy when the correction is lower.