Downtrend
Candlefocus EditorIn stock market terminology, a downtrend is defined as a distinct downward trend in the price of a security. It is usually measured in terms of lower peaks and troughs which in turn reflect a reduction in the amount of investment confidence and a decrease in the number of investors willing to purchase the security. Unlike rallies, downtrends may continue for an extended period of time and are not limited to just one particular sector or security.
A downtrend is caused by a combination of factors including a decrease in economic output, weakening company fundamentals, rising supply levels, and diminishing demand. When the overall economic environment is poor, investors lose confidence in the stock market and in the strength of the companies being traded and demand for them declines potentially leading to a downtrend. Rising supply levels of stocks mean that more investors are selling, creating an imbalance between buyers and sellers and driving the overall price of the security down. In addition, a weakening of a company's fundamentals due to deteriorating financial performance, management changes, and unfavorable news can lead to a reduction in investor sentiment and a declining demand for the security resulting in a downtrend in price.
In the near-term, investors may find that it is difficult to determine the impact of these factors on the pricing of a security, but in the long-term, a downtrend is usually recognizable. The volume of trading in a security, the trend in the amount of money flowing into or out of the sector, and the overall market performance all provide clues as to whether a security is in a downtrend or not.
Overall, downtrends are characterized by declining prices in a security, a shift in the supply of stocks investors want to sell compared to demand from investors who want to buy, and a weakening of the underlying company or market fundamentals. They can be caused by a variety of factors and are usually recognized by the volume of trading, amount of money flowing into or out of the sector, and the weakness of the underlying company or market conditions. Downtrends, when recognized in the early stages, can provide opportunities for investors to book profits from their investments, as well as help inform decisions about when to exit positions or move to defensive stocks.