How To Spot a Bearish Trend: It’s no longer news that everyone enters the financial market to make money, say wealth accumulation, passive income, etc. Seth Klarman states, “the true investment challenge is to do well in tough times.” This quote explains the significance of the bearish side of the market, and such trends should also be prioritized.
Thankfully, in most financial markets, one can make money on either bullish or bearish market conditions. So, before starting the trading day or week, the first on your to-do list should be spotting existing trends. Are prices going higher highs or lower highs? How long has the trend been in existence? What stage of the trend is the market? Etc.
But the big question is, how can you spot the trend to maximize your income? In this article, I have comprehensively explained everything you need to know about spotting bearish trends when trading the Forex, Crypto, or Options/Synthetic market.
First, What Is a Bearish Trend?
A bearish trend is an adverse shift in the trend, trade cycle, and economic prospects, which may likely wipe out most of the profits made by short-term traders. In simpler words, a bearish trend refers to a declining market. While bullish trends signify an upward movement of prices, a bearish trend is the downward movement of prices.
A bearish trend is characterized by substantial investor uncertainty about falling market prices. It is a market condition whereby the Bears (sellers) have taken over.
Top 3 Ways to Spot a Bearish Trend
The top 3 ways to identify a bearish trend are by using Technical indicators, Price action, and Chart Patterns.
1. Using Technical Indicators
Bearish technical indicators are the tools that give a forecast of price based on history. The bearish technical indicator help checks the trend reversal or changes in the ongoing trend and helps forecast future price predictions. Also, indicators alert the trader or investor beforehand of any upcoming trend.
However, never use an indicator in isolation. Always use them in multiples, particularly to confirm your trading bias.
Here are a few technical indicators to spot bearish market conditions:
Relative Strength Indicator (RSI): RSI is an oscillator that displays the rate of price change. RSI movement (overbuying and overselling) is estimated price momentums over the last period (typically 14 days) divided by the number of times to reach the average.
RSI oscillates between 0 to 100 levels. A commodity, cryptocurrency, or currency pair is typically oversold when it crosses the 30% level and overbought when it moves above 70%.
RSI is most effective in the ranging or sideways market and confirms the trends’ reversal. If the price is approaching or in the overbought region, prepare for a bearish market condition. Prepare to buy such a commodity or currency pair if in the oversold area.
Simple Moving Averages: Simple Moving Average helps spot long-term trends, whether bearish or bullish. It refers to the mean of the price range over the past few days. This period can be changed entirely and compared with different time frames. Due to its simplicity, it’s one of the most commonly used technical indicators by traders to spot market trends.
Here is how it works: if the prices trend higher than the moving averages, the market is bullish, while when the price goes lower than the moving averages, the market is bearish. In the long run, prices always trend near the moving averages.
The point where the short-term moving average and the long-term moving average intersects is called a death cross. Be prepared for a strong price reversal – from bullish to bearish – whenever you spot a death cross.
2. Price Action Trading
Price Action Signals – Price Action Triggers or Price Action Patterns – are market patterns that predict upcoming market behaviors based on previous price performances.
Price Action trading examines the performance of an index, security, commodity, or currency to forecast its performance in the future. For example, if your price action analysis tells you that the price is about to increase, you might want to take a long position, or if you think the price will fall, you might decide to short the asset. Trading with price action involves listening to the market and then reacting accordingly.
Understanding price action trading entails looking at patterns and identifying the key indicators that may influence your investments. So, it’s all about using the patterns on your chart to decide whether you should react.
At its core, price action trading is a game of highs and lows. Price action traders can follow the highs and lows sequence method to map out bearish trends in their market. For instance, a price trading at higher highs and higher lows shows that it’s on an upward trend (bullish), and if it’s trading at lower highs and lows, it’s downwards trending (bearish).
Some price action trading strategies that you can use to spot a bearish trend include:
Head And Shoulders Reversal Trade: As the name implies, the head and shoulders pattern is a market movement similar to a head and shoulders silhouette. In other words, prices rise, fall, and rise even more, then fall again and rise to a lower high before progressing into a freefall.
The Head And Shoulder reversal trade is one of the most popular price action trading strategies, as it’s pretty easy to take an entry point and set a stop loss.
Traders can use their knowledge of the sequence of highs and lows to choose an entry point at the lower end of an upward trend and set a stop just before the previous higher low.
Pin bar: This is sometimes known as the candlestick strategy due to its distinctive shape (it looks like a candle with a long wick). It characterizes a sharp rejection and reversal of a particular price, with the “wick” or “tail” showing the rejected price range.
It is assumed that the price will continue to move in the reverse direction to the tail, and traders will use this information to decide whether to take a long or short position in the market. For instance, if the Pin Bar pattern has a long lower tail, this tells the trader that there has been a downward price trend rejected, meaning the price could be set to rise. On the other hand, a long upper wick tells that the market is about to go bearish.
3. Monitoring Chart Patterns
Chart Patterns are the root of technical analysis.
Chart patterns include the following: head and shoulders, double top, double bottom, rounding bottom, cup, and handle, wedges, pennants or flags, ascending triangle, descending triangle, and symmetrical triangle.
However, there is no one “best” chart pattern, as they are all used to spot different trends in different markets.
Categories Of Chart Patterns
- Continuation Chart Patterns: This is a known chart pattern that an ongoing trend will continue.
- Reversal Chart Patterns: This show that changes are about to take place in the direction of a trend.
- Bilateral Chart Patterns: This allows traders to identify that the price could move either way – meaning the market is vastly volatile
The essential thing to remember as part of your technical analysis when using chart patterns is that they are not an assurance that a market will move in your predicted direction – they are merely a sign of what is likely to happen to an asset’s price.
Conclusion on How To Spot A Bearish Trend
Every investor or trader needs to know how essential it is to protect their profit and, more importantly, their trading capital. Therefore, you must always actively work towards keeping a safe margin to protect your portfolio from the headwinds of the markets.
No matter your trading strategy or system, having a solid understanding of the market trend will make you a better trader. I hope this article will help you how to spot a bearish trend more quickly and effortlessly.
However, if you still have further questions on spotting a bearish trend, don’t hesitate to share them with me via the comment section below.