What is a Downtrend?

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A downtrend occurs when a stock is making lower highs and lower lows. The picture below illustrates this. This stock has been going down for a while.

When a stock is in a downtrend we should assume that it will keep going down. Do not buy a stock during a downtrend. This is called bottom picking and is probably the riskiest way to trade the stock market.

There are a couple different ways to trade a stock that is in a down trend. Let me list a few.

You can swing trade a stock that is in a downtrend. When you do this you are looking to short the stock at resistance and buy it back at support. DO NOT buy a down trending at support and try and to sell it at resistance. This is both risky and may not produce that much of a reward.

You could also be a trend trader. If you were you were to trend trade this stock you could short it at resistance and ride it down. Then buy it back when it broke its trend. Be careful trend trading on the down side can be harder then trend trading on the up side.

Whatever you do, DO NOT be bullish on down trending stocks. If you cannot fight your natural instinct to buy don’t trade it.

Remember to create your own systems. Never risk too much in 1 trade, and have fun.