Usually, traders choose to make money on the upside movements. Yet, bearish trends can be profitable, too. Today we talk about how to profit from downtrend in Forex?
A lot of Forex traders a looking for investment opportunities, when the price is on the rise. This approach to the trading normally is based on the intention to benefit from an uptrend in the price.
However, you can also make significant profits from the drop in prices. Similarly, this type of price movement is called downtrend. But still, how to profit from downtrend in Forex?
Downtrend in Forex: How to make money?
If you want to succeed in making money in a downtrend, you will need to use a short-selling technique. Besides, in case you will learn how to identify a downtrend, you will be saving your money. You can get out of assets that you bought, so all the profits are not offset by a drop in the price.
In this article, we will focus on how to profit from downtrend in Forex, what causes the downtrend to reverse and what is the structure of a downtrend.
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Structure of a Downtrend
A downtrend consists of two types of price waves. These are impulse and correction waves. In case stock slips from $15 to $14.50, then climbs back to $14.75 and then eventually falls to $14.30, all of these movements are price waves. Now, what is the difference between impulse and correction waves?
When we talk about impulse waves, we consider larger movements: from $15 to $14.50, and $14.75 to $14.30. The corrective waves are smaller: from $14.50 to $14.75.
The above process shows you how the price is forming its direction/trend. For instance, in case the price posts an impulse wave down, and then it is followed by a corrective wave to the upside, we register a general progress to the downside. Speaking differently, the downtrend will continue as long as impulse waves will occur to the downside and corrective waves happen to the upside.
Also, you can think of a downtrend as a sequence of lower highs and lower lows. In the chart below, you can see the movement from the left to the right. Each impulse wave reaches a lower point that the last one. Therefore, highs of each correction move to the downside.
What Causes Downtrend to reverse?
The downtrend will reverse in case the scenario we described above is breached. For example, if an impulse wave happens to the upside and then the corrective wave will occur to the downside, the overall price movement will be directed upwards. Instead of lower high and lower low, we will witness higher high and higher low.
Traders that have experience in trend trades, usually adapt to the new price directions as they occur. However, there is a possibility that the price may move into a downtrend, and then signal the downtrend violation, yet again come back to the downtrend. Another quite possible situation is that the price could go to the uptrend or even sideways.
Irrespective of the scenario, the movements of the impulse waves will provide you with knowledge of the trend direction. In case the down and up impulse waves are the same size, then the price is moving sideways.
We reach the final part of our discussion -
How to profit from a downtrend in Forex?
When you see the impulses that occur to the downside, favour short-selling on upside corrective waves. In the same way, when the impulses are up, go for the longing on the corrections lower.
How to profit from a downtrend in Forex?
One good thing about trend trading is that trends are occurring in the market nonstop. You can trade them both in a short-term chart and/or on the long-term time frames. The same trade concepts are relevant for one minute chart and weekly chart. While you are looking at a one-minute chart, trades are normally entered to lock in profits occurring from in small trends (minutes, seconds). However, on a weekly chart, you would seek for trades that could last for much longer.
Once a downside impulse wave emerges, there is an opportunity for the new downtrend to start. Thus, when a correction to the upside occurs, it most likely will not advance till to the point where the impulse wave started, since correction waves are smaller. That is why you need to short-sell during the corrective wave.
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There are a lot of techniques of entering a trade during a correction. For instance, Fibonacci retracement levels aid identify areas where the correction could stop and go the other direction. One more method is to wait for the corrective wave to stop rising, and then let the price move sideways. Afterward, when it starts to slide again, enter a short trade.
Also, it is very useful to use a stop loss order on each trade you enter. One more crucial moment here is to have a proper strategy to exit your trades. In general, trend trading might seem easy for you on the first sight. Nevertheless, we warn you to exercise caution, when trading on Forex.
In addition to above, it is necessary to say that the above article is intended to provide general information and it cannot be considered as an investment advice. You must always test the strategy on the demo account and trade in the real-time market only when you start making consistent profits.
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