Uptrends and Downtrends: How to Spot and Trade Them?
In this article, we explain what uptrends and downtrends are and how to use them in your trading strategy.
What is a Market Trend?
Generally, there are 3 types of trend distinguished: an uptrend, a downtrend and a sideways trend.
- The term uptrend is used to describe an overall upward trajectory in price.
- A downtrend is formed when the asset price is overall falling in value over a prolonged time period.
- A horizontal or sideways trend is characterized by limited price movement, often within a certain range.
What are Trend Lines?
Trend lines are a key aspect of technical analysis (TA). They are usually represented by a line, several lines or a curve connecting critical price points on a chart. Trend lines help traders grasp the general direction of the market and assess the direction and strength of price trends.
If you are new to this topic and would like to know more, we strongly recommend checking out another article at the TabTrader Academy in which we explain what trend lines are and show the best ways to use them.
What is an Uptrend?
When the price movement of an asset is mainly directed upward, it is called an uptrend. In an uptrend, each successive local high or low is higher than the previous ones.
However, an uptrend does not necessarily mean that the price only goes up. It may retrace from a certain level and consolidate a little, but the most important thing is that each subsequent consolidation formed is higher than the previous one and followed by further upside.
What is a Downtrend?
When the price movement of an asset is mainly downward, it is called a downtrend. In a downtrend, each successive local high or low is lower than the previous ones.
Again, during a downtrend the price of an asset does not have to go down in a straight line; it can experience occasional spikes and temporary upside reversals within the broader trend.
Overall, there are three different types of trend analysis: technical analysis, fundamental analysis and sentiment analysis.
Uses an array of tools, among them trading indicators and metrics, to infer information from price charts.
Assesses the relative condition of an asset — how overbought or oversold it is at a given price — based on a wide range of external factors. Traditionally, fundamental analysis consists of three ‘layers’: economic, industry and internal or company analysis.
In cryptocurrency, where it is cryptoassets rather than stocks under assessment, network health is used as an internal measure. If the asset being analyzed has a corporate issuer, as is the case with various altcoins, that issuer’s provenance is also an important consideration within fundamental analysis.
Is relatively similar to the previous type of analysis but relies more on nontechnical data, specifically that conditioned by human psychology. Sentiment analysts study the attitudes of investors, influencers, experts and news agencies towards a particular cryptocurrency. While this is the least predictable approach to analyzing trends, it nevertheless explores an important side of trading in any market.
Trading an Uptrend Market
It is advantageous for every trader to catch the peak of an uptrend, ideally just before it reverses, in order to sell at the highs. Let’s take a look at how uptrends can be spotted in the wild.
How to Spot an Uptrend
As mentioned above, an uptrend is characterized by higher peaks and troughs over time (as illustrated on the chart below). In an uptrend, a trend line is usually drawn by joining two or more swing lows. One broad guide to spotting the end of an uptrend is when price crosses this trend line. For instance, the uptrend on the chart below ended around mid-April when the price crossed below the trend line.
There are also many chart indicators that can be used to predict bearish-to-bullish trend reversals, such as “inverse head and shoulders” or “double bottom” chart patterns. For more information, check out the TabTrader Academy’s article on classical chart patterns for beginners.
How to Trade an Uptrend
Let’s use the chart above to see how an order might be executed during an uptrend.
First of all, a trader needs to confirm that the trend is going to continue. This can be done using technical indicators and chart patterns.
The trade would then proceed as follows:
- The trader sees a price pullback — the moment when the price retreats a little from its previous high.
- The trader then needs to confirm a pullback and see if price bounces back into an uptrend.
- The trader goes long with a buy order for $36,000.
- To make sure their back is covered, the trader might also set a stop-loss order at the deepest recent pullback point (in this case $32,000).
- After that, it is up to the trader to decide when to exit the trade. A good point would be the moment when the next low is lower than the previous one, which is around $60,000 on this chart. It would also be wise to use different chart patterns to predict the upcoming trend reversal.
Trading a Downtrend Market
How to Spot a Downtrend
A downtrend is characterized by lower peaks and troughs over time. The graph below demonstrates an instance of a downtrend. The price may be seen making lower highs and lower lows over time. In a downtrend a trend line is created by joining two or more peaks or high points.
How to Trade a Downtrend
Let’s consult the chart above to figure out how a successful order is performed in a downtrend.
First of all, it is important to make sure that what we see is indeed a downward trend and not another pullback. Technical analysis offers several indicators and chart patterns for trend confirmation.
Once a downtrend is confirmed, a trader might do as follows:
- A trader spots a minor price increase during an overall downtrend.
- The trader waits for price to cross the resistance level and fall back again, then confirms the downtrend.
- After that, the trader can place a sell order at around $12,100 preparing to go short.
- To reduce risk, it could be prudent to also place a stop-loss order a little higher than the entry point at its peak, which would be approximately $13,300 in this case.
- Depending on their appetite for risk and trading strategy, the trader then exits the market. Usually, traders exit a position when the price makes a higher low, the technical indicator flips bullish, or when the price crosses the trend line. In this case, the trader closes the order when the price makes a higher low at about $10,200.
Trading is practically impossible if one cannot tell an uptrend from a downtrend on a chart. Traders can confirm trends by simply looking at charts or using tools such as trend lines or more advanced technical analysis tools.
However, it is important to note that, even when a trader defines the trend correctly and is sure it is not going to reverse soon, crypto markets can be extremely volatile.
This is why we strongly recommend our users reduce risk of loss or liquidation by setting up stop-loss orders or trailing stop orders.
Uptrends and Downtrends FAQ
What is a downtrend?
An asset is believed to be in a downtrend when its overall price performance is declining. Each successive spike or low point in a downtrend is positioned lower than the one before.
How to trade in a downtrend
The best case scenario is when the trader manages to open a sell order during a minor price increase. Then, if it really is a downtrend, the price will continue falling. Still, we recommend using stop-loss orders to limit risk. When a trader gets confirmation from different indicators that the trend is reversing, this can be an advantageous time to close the order.
How to trade in an uptrend?
A suitable strategy is to buy on a pullback, the moment when the price comes down a little. Thereafter, if it truly is an uptrend, it will produce even higher highs. Here, it is also advisable to limit risk by using a stop-loss order. Using technical analysis tools a trader can determine the possible trend reversal point, where it may be beneficial to close the order.
How to spot trends in stocks
Spotting trends may involve different approaches. Some choose to define the trend using only technical data and indicators, while others prefer to rely on fundamental or sentiment analysis. With stocks, there is quite a lot of data to work with — plenty of chart information for technical analysts and a long history for fundamental analysts to study and base their assumptions on.
How to spot trends in the cryptocurrency market
Crypto markets are no different from traditional markets in terms of trends and price movements. They may be much more volatile, but other than that, all the basic approaches of technical, fundamental and sentiment analysis can be applied to cryptocurrencies as well.