A lot of new forex traders have a hard time coming to terms with something on the forex market. This point is that you can make money when the currency pair is in a down trend. We have all been conditioned to see down trends as something bad. However, when you trade the foreign exchange rates market this is actually a good thing. It is important that you understand why down trends are good and how you can profit from them.
The Misconception of Down Trends
The main problem that many new traders face is breaking the misconception that is ingrained about down trends. We are told that when there is a downward movement on a chart this is bad. This is generally due to the down trend meaning losses in traditional investments. This is something you have to break away from if you want to make a profit on the forex market.
The Foreign Exchange Rates Down Trend
Down trends in foreign exchange rates are a bit different to the ones you view on the stock market. When you are looking solely at the exchange rate of your own country you are only focusing on a single currency. When there is a down trend on a single currency this means that the value of the currency is decreasing and this is bad. It will cost you more to buy a certain amount of another currency. However, when you see a down trend on the foreign exchange rates market you have to consider that this is a reflection of a pair.
This means that the value of one currency is decreasing, but the value of the second currency is increasing against it. As the forex market works with pairs you are always selling one and buying the other. The logic of the down trend in this case is that while one currency loses value the other gains value. If you are looking at a down trend on the AUD/NZD pair then the New Zealand dollar is strengthening while the Australian dollar is weakening.
How to Profit from the Down Trend
It is as easy to profit from a down trend in the forex market as it is to profit from an uptrend. To do this you will need a trading strategy and a trading system. Most strategies will have indicators that you can trade on for up and down trends. It is important that you learn what the indicators are for both of the trend directions.
There are also chart patterns that you can look for. These patterns will occur in both of the trend directions. Of course, you have to consider that the pattern may be reversed for the down trend. This can be seen when you use the double top, or head and shoulder patterns. With the double tops the pattern turns into the double bottom because the peaks will be at the bottom of the chart. The head and shoulder pattern will also be upside down.
The Selling and Buying
When you trade on the foreign exchange rates market you will see that you can buy and sell a currency pair. It is this buying and selling that allows you to profit from the up and down trends of the market.
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