Market downtrends can be very daunting for many investors. It poses a real challenge of finding opportunities to generate profits while defending the current trading position.
Any miscalculation may cause substantial losses and failure to meet financial targets.
Perhaps one time in the past, you’ve been in this situation. That experience is proof that predicting market trends can be hard, and it illustrates the fact that investors need to be fully equipped.
What does that mean? You have to be prepared for both the good and bad market conditions and devise an effective approach to handle contingencies.
Remember, you are not always at the right place and at the right time.
Meaning, your investment plan should be holistic, taking into account the fundamentals and technicals of the industry.
This provokes the idea that uptrends and downtrends are just natural phenomena when you’re doing business.
It’s not without challenging times. But it does not mean that you cannot adapt to the changing market trends.
There’s always a workaround when the market is moving in your direction.
The following facts can guide you in crafting the right approach when you’re facing a market downtrend.
Understanding Market Downtrends
Although asset prices may move intermittently higher or lower, downtrends are characterized by lower peaks and lower troughs over time.
That’s why technical analysts would normally pay attention to downtrends because they represent something more than just a random losing streak.
Assets in a downtrend may continue trending lower until some market trend changes, signifying that a downtrend marks a deteriorating condition.
There are particularly three events that characterize a market downtrend, as discussed in the following:
- Supply exceeds demand – this means that the number of available sellers and the quantity of an asset being sold is more than the number of ready buyers and the quantity they wish to buy. To some extent, market participants would no longer accept the idea that the asset should be valued as high as it is.
- Increasing number of market participants – although previously undecided, many players become convinced during the recent peak of the price that they should no longer own the asset. The number of sellers, in this case, increases simultaneously while the number of buyers is decreasing.
- Validating updates, such as news or new information – this may confirm the suspicions of participants who are determined to exit, or no longer consider buying the asset. Many buyers may decide to back away, and more sellers would be eager to generate profits or limit losses.
Analyzing Trading Downtrends
Most Crypto Engine traders seek to avoid downtrends because they are inherently focused on upward trends.
But since a downtrend can occur in any given period, you should look for ways to identify this scenario as early as possible.
You can do this for new trading opportunities, especially if you prefer to trade both long and short. One of the best platforms to do this is the Bitcoin Up site.
Often, traders would recognize that once a downtrend has been established within a specific time frame, they should be very careful about entering into any new long positions.
This can exacerbate the downtrend by supporting a reduced demand. For some players, this offers an opportunity to profit on the downtrend as they recognize the opposite outcomes.
To identify and confirm downtrends, traders would use certain indicators, such as technical analysis and chart patterns.
For example, a moving average can be used to determine the overall trend. If the price is lower than a moving average, the asset is likely to be in a downtrend and vice versa for an uptrend.
Other technical indicators such as the relative strength index can be used to show the magnitude or strength of the downtrend at a given point in time, helping traders to decide whether or not to enter a short position.
Profitable Opportunities during Downtrends
While a market downtrend presents some challenges for a trader, it also offers some opportunities to make some profit.
One strategy is to buy cryptocurrency at a lower price and then wait to sell it when profitable.
Many traders are anxious about downtrends because asset prices begin to drop, and they might panic at the thought of losing money.
But for advanced players, they would exploit short-selling as a strategy to earn returns despite challenging market conditions.
As a refresher, shorting means selling a given amount of cryptocurrency at a certain price and buying back such an amount at a lower price.
This means that your possible loss is limited to the amount you invest when you purchase an asset. On the other hand, when you short cryptocurrency, the price of your asset may continue to rise.
Since there is no ceiling on how high the price could increase, you have a higher opportunity to lose.
But the outcomes would still depend on the strategies that you employ when the market is going through downtrends.
How to Mitigate the Risks in Downtrends
Investing in cryptocurrency for the long term can be considered a smart strategy, even if you decide to put your eggs in several baskets.
Diversification of your investment portfolio can mitigate the risks in highly volatile markets. Using this strategy, you can offset the losses with the rest of your investments.
Likewise, valuing predictability and minimizing the risk would denote choosing assets that are trading at high volume.
This makes a huge difference because it can boost the impact of your trades.
Also, remember that if your cryptocurrency is governed by one or two big players, the purchase of large assets may increase the price exponentially.
The right conclusion that can be drawn from the foregoing facts is that market downtrends are not really something to be afraid of.
If you have effective strategies in place, you can still make some profit during challenging times. It’s a matter of perspective and putting the best approach into practice.
As you conduct crypto trading, you’ll realize that there’s more to learn and that success in this industry is very elusive, but you can always get to the top in time.