Uptrends and Downtrends: How to Spot and Trade Them?
Key Questions Answered
Traders and investors can make money by studying the traditional market’s long-term and short-term price movements. When the movement of prices is predominantly in one direction, it becomes a price trend. These trends are made up of peaks and troughs that move ascending, descending, or sideways. If the peaks and troughs move in an ascending direction, it is an uptrend. If the peaks and troughs move in a descending direction, it is a downtrend.
How to Spot an Uptrend?
As mentioned above, an uptrend occurs when a price chart’s peaks and troughs move upwards. An example of an uptrend is shown in the figure below wherein the price can be observed to make higher highs and higher lows. For an uptrend, one can draw a trendline or support line underneath the chart by connecting two or more troughs or low points. The support trendline also serves as an indicator for traders and investors to predict when the uptrend will end and signify a possible change in trend. For example, from the figure below, the uptrend ends in mid-April once the price breaks below the uptrend line.
How to Spot a Downtrend?
A downtrend occurs when a price chart’s peaks and troughs move downwards. An example of a downtrend is shown in the figure below. An example of a downtrend is shown in the figure below where the price can be observed to make lower highs and lower lows. For a downtrend, one can draw a trendline or resistance line above the chart by connecting two or more peaks or high points. The resistance trendline also serves as an indicator for traders and investors to predict when the downtrend will end and signify a possible change in trend.
How To Trade During an Uptrend?
Traders generally go long during an uptrend by first analyzing the price movement. Experienced traders may use technical tools and indicators, such as Moving Averages, Bollinger Bands, and the Stochastic oscillator, to verify the price movement before making trades. The most common price action trading strategy involves buying during a price pullback. In an uptrend, the price will predominantly increase with small drops. To trade price pullbacks, traders should analyze the price chart. They should pay attention to the point where the price movement halts at a particular peak, falls, and makes a trough.
The basic steps to trade such price pullbacks are as follows:
- The trader identifies a price pullback, where the price of an asset is falling from its previous peak.
- The trader waits until the price bounces back up at the support trendline, confirming that the uptrend is still intact.
- The trader places an order around the identified price point of around $36,000 and prepares to go long.
- To limit losses, the trader places a Stop Loss order below the entry point at the trough. In this case, the Stop Loss order is placed at around $32,000.
- The trader then exits the market according to their risk tolerance and trading strategy. Typically, traders exit when the price makes a lower low, the technical indicator turns bearish, or when the price breaks below the trendline. In this case, the trader exits when the price breaks under the support trendline at around $60,000.
How To Trade During a Downtrend?
Traders generally go short during an uptrend. Most traders and investors typically do not go long in a downtrend as they worry that the price may fall even further. However, some investors might accumulate positions during a downtrend to average their high cost-per-shares. In a downtrend, the price will predominantly decrease with small price increases. To trade in a downtrend, traders should pay attention to the point where the price movement halts at a particular trough, rises, and makes a peak. The basic steps to trade in a downtrend are as follows:
- The trader identifies a price increase during a downtrend, where an asset’s price rises from its previous trough.
- The trader waits until the price hits the resistance line and falls back down, confirming that the downtrend remains intact.
- The trader places an order around the identified price point of around $12,100 and prepares to go short by borrowing from exchanges.
- To limit losses, the trader places a Stop Loss order above the entry point at the peak. In this case, the Stop Loss order is placed at around $13,300.
- The trader then exits the market according to their risk tolerance and trading strategy. Typically, traders exit when the price makes a higher low, the technical indicator turns bullish, or when the price breaks above the trendline. In this case, the trader exits when the price chart makes a higher low at around $10,200.
What are the Factors Affecting the Upward and Downward Trends?
Unlike stocks in the traditional market, cryptocurrencies are not regulated by any central authority and are much more volatile. Moreover, the cryptocurrency market is quite new compared to the traditional market. Due to its newness, the cryptocurrency market thrives on speculation, where investors make bets (sometimes randomly) on obscure cryptocurrencies in anticipation of huge profits, driving prices up in the short-term.
Cryptocurrency prices rely on various factors such as major news events and supply and demand. Details about these two factors are as follows.
- Major news events: Cryptocurrency prices are very vulnerable to price shifts due to major news events. Good news regarding cryptocurrencies will drive the price of particular crypto upwards, while bad news will set the momentum into a downward trajectory. Examples of good news include new features and partnerships, while examples of bad news include regulations and lawsuits. If there is news or rumors about a particular project’s new liquidity mining features or partnerships with mainstream brands, investors may look to buy the crypto, driving the price up. Alternatively, if there is news about regulation crackdowns or lawsuits, investors may opt to exit the market in anticipation of a price crash. For example, Loopring’s (LRC) price increased by more than 500% in one month following GameStop partnership rumors, while Ripple’s (XRP) price fell by 25% following its US lawsuit.
- Supply and demand: Different cryptocurrencies adopt different models, for example, some projects have fixed token supply with or without deflationary mechanisms while others do not. For cryptocurrency with an inflationary mechanism, the increasing token supply may result in increased supply, negatively affecting the price. The demand for a particular cryptocurrency also plays a role in determining the price. As cryptocurrency adoption grows, demand rises. Consequently, the price of this cryptocurrency might increase, especially if it has a limited supply.
How To Analyze Price Trends?
There are three approaches for price trend analysis, which are technical, fundamental, and sentimental analysis. Details of these types of approaches are as follows:
- The technical analysis approach involves the use of various technical tools or indicators. Traders utilize these tools or indicators to spot possible trends that are missing from normal candlestick charts. Some traders use historical data and price movements to predict whether there will be an uptrend or a downtrend in the future. To make more accurate predictions, traders will need to master the available tools.
- The fundamental analysis approach involves researching projects. This is more applicable for investors who need to look into a particular project’s tokenomics, vision, and team before investing in the project. Projects with good fundamentals, development, and reputation tend to attract more interest, resulting in higher gains during an uptrend and easier price recovery after a downtrend. However, readers should note that the cryptocurrency market is still young. As a result, projects regarded as novel might be replaced by newer projects with better and more advanced technology.
- The sentimental analysis involves the sentiment of the various crypto users, influencers, and financial news outlets towards a particular cryptocurrency. The market sentiment is the collective opinion of the crypto community on a specific project and its coin or token. If the market sentiment is very negative, panic selling might occur. In contrast, the price might pump if the market sentiment is very positive. However, readers should note that positive market sentiment may not necessarily translate into a bullish market.
Analyzing price charts to spot market uptrends and downtrends are the fundamental skills that all traders and investors should know. Users can make huge profits by knowing how to spot whether a market is in an uptrend or a downtrend. Some traders may use additional tools such as technical indicators or various analytical approaches to confirm the uptrends or downtrends before submitting a trade order. However, trading during an uptrend or downtrend still involves a certain degree of risk. As the cryptocurrency market is volatile, sudden price drops or price pumps are common occurrences. Thus, traders are advised to set their Stop Loss orders to prevent huge losses properly. In addition, novice traders should practice with such tools before utilizing them in trades.