A downtrend refers to a market condition characterized by a sustained decrease in the price of an asset over time. It is identified by a series of lower lows and lower highs on a price chart.
On a price chart, a downtrend can be visually represented by drawing a trendline connecting the series of lower highs and lower lows. This line slopes downward. That’s because there are too many sellers and too little demand, so the price goes down.
The highs are also lower because sellers are motivated to get rid of their position, and there aren’t enough buyers to step in and replace them.
Here is an example of a downtrend: a stock’s price falls from $100 to $80, then bounces to $85 before dropping to $70, and so on. Each low here is lower than the previous low and each high is lower than the previous high.
Understanding and identifying a downtrend is crucial for traders as it helps in making informed decisions about entering, exiting, or adjusting positions based on market conditions.
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