The Downward Trendline or Downtrend

A downtrend happens when stock or share prices create a graph trace of lower highs and lower lows. We can add a falling or downward trendline to a chart by linking the high points with a straight line. You can see an example of this in the chart below.

As soon as we have two consecutive high pointss we can then join them with a straight line to make what is classed as an unconfirmed falling trendline.

For the trendline to become confirmed, and therefore validated, the price of the stocks or shares traced on the chart must respect it by rebounding from that line for a third time.

Confirmation of a falling trendline is considered to be a very powerful sell signal.

Chart of a Stock in a Downtrend

After confirmation of a falling trendline, it is considered by many wise to stay out of the stock for as long as the share price remains below the confirmed trendline.

A natural human instinct of many investors is to search out a bargain and they are attracted to stocks whose price is falling. It has been found, however, that a using a strategy of only investing in stocks whose price had fallen significantly often results in poor or lower profitable returns compared with other strategies.

Given the choice it is often better not to buy stock where the price is in a downtrend, i.e below your downward trendline. The suggestion would therefore be to wait for an indication that the downtrend is over before buying the stock.

For some investors, the end of the downtrend might be signaled by a trendline break. (see the chart above) While others prefer to invest only after an uptrend has been confirmed.

Using the second chart shown on this page as an example, although an uptrend follows the downtrend, (after the breakout) the uptrend has not been confirmed. Some investors will only buy a stock if the uptrend is confirmed.