Down Trending Stocks And Trends in The Stock Market
It is common sense to buy something when its price is low and sell when the price is high. Technical analysts would tell you that in case of stocks, this statement is not true most of the time.
Trends in The Stock Market:
The 2 Important Terms - Support & Resistance in Technical Analysis Stocks
Support & Resistance Levels To Trade Down Trending Stocks
- When down trending stocks pullback i.e. the price starts moving up after a fall, then one has to wait and short or sell the stock when it reaches the resistance level. This is because technically, the stock will touch resistance and fall. However, this may not always happen and if the stock breaches resistance, there may be a trend reversal which means that the downward trend will stop and an upward trend will begin. This will result in a loss to the trader. So to minimize loss, a stop loss has to be placed just above the resistance level.
- Another way to trade down trending stocks is to sell or short the stock when it breaks through the support level. Stocks usually touch support levels and bounce back. But the down trend may be so powerful that no buying emerges at the support level causing the stock to fall even further. Again, there is no guarantee that the price will keep on falling and it is advisable to place a trailing stop loss.
The low prices may tempt one to buy down trending stocks but it is better to desist from buying these stocks. The prices of these stocks could be falling due to a reason one may be unaware of and buying should wait till one can see a firm uptrend. ‘Cheap is not always best’ and ‘picking the bottom’ may sound good in theory but is not easy at all. The investor or trader may just end up buying a stock which still has room to fall.
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