What is Uptrend and Downtrend?
A downtrend happens when an asset’s price moves lower and lower over time. The price may fluctuate higher and lower over the course of a day but a downtrend means that there are lower and lower peaks and troughs throughout a longer period. An uptrend is, of course, the opposite, whereby the peaks and troughs are on an increase over the course of a sustained period of time.
Traders usually look to avoid a downtrend because the value of their investment is usually adversely affected. Depending on the asset or the trade, a downtrend could last for minutes, weeks or years. Uncovering downtrends early on is crucial. Once it has been identified, traders need to be cautious about entering new long positions.
Sellers can look to make a profit from a downtrend by borrowing and selling the shares again whilst agreeing to buy them again in the future. This is what is meant by a short position. If it continues to go down in price, the trader can profit from a difference in the sale price and the future re-buy price that’s lower.
What is Support and Resistance in the Forex Market?
Support and Resistance in the Forex market are all about technical analysis. Traders can seek to buy at the significant level of support in the uptrends, or as near to it as possible, and look at selling at the significant level of resistance in the downtrends.
It’s the same as the old cliché in the business of “buying low and selling high”. Forex traders who are new on the scene usually want to know how low ‘low’ is and how high ‘high’ is. A way of quantifying this is in using an area in which the prices stop and have changed direction. Where the price stops after the move upwards and then does a downturn is called the ‘resistance’. It is like a ‘ceiling’ which caps the advancement of the price further.
It isn’t random. There are the potential traders (sellers) who have sold a pair before and they remember the power that they had to collectively push a price lower. There are the buyers too were disappointed with a lower price and will, therefore, close their positions just before the price makes it to the ceiling of resistance. All the traders, therefore, work together to make the prices lower, effectively making the “supply” in a supply and demand relationship. If there’s more demand than supply, prices rise.
What does Lower Highs and Higher Lows Mean in the Forex Market?
Lower highs simply mean that the chart is on a downtrend, that the highest prices are generally lower than the previous high prices. The higher lows are the opposite and means that the chart is on an upward trend, with each low price of the period being higher than the previous low price.