Downtrend: Lower Highs and Lower Lows
A downtrend is a sequence of lower swing highs and lower swing lows. It is defined by the order of those points rather than by the angle of a line, which matters because a chart can look like it is falling without the sequence being intact.
How it works
A downtrend is two conditions at once. Each swing high is below the previous swing high, and each swing low is below the previous swing low. One without the other is something else.
The definition is about order, not angle. A steeply falling chart whose swing lows are flat is not in a downtrend by this definition, and a gently drifting one with a clean sequence is.
Which swings count is a setting. A 0.5% swing filter on this site’s shared history finds 175 turning points; a 3% filter finds 15. The sequence is different at each, and both readings are honest.
What the runs look like
Across 42 swing lows at a one per cent threshold, the longest unbroken run of lower lows was 4. In 576 bars, once.
Most runs end at two. That is the planning number — a trend trade held for a third and fourth leg is holding through the part of the distribution where those legs mostly do not arrive.
The asymmetry people describe is about pace rather than length. On this history the longest run of lower lows was 4 and the longest run of higher highs was also 4 — identical, on a series that finished above where it started.
The rallies inside a downtrend are the problem. They are fast, they are large relative to the bars around them, and they end most short positions that were sized as though the trend would simply continue.
In practice
The participation check is directional. Volume expanding on the falls and thinning on the bounces supports the sequence; the reverse pattern is the early warning that it is ending.
Every downtrend contains uptrends on a faster chart. That is not a contradiction; it is what a retracement looks like when you zoom in, and it is why the timeframe has to be stated before the word means anything.
A gap is where the largest single moves land, and a stop on a short position gives no protection against one that opens above it.
The stop belongs above the most recent lower high. Price above that level has broken the sequence, which is the definition of the trade being wrong.
Repeated attempts to call the bottom are the expensive habit. Each is a round trip at 2% of a median bar’s range on this history, before any question of being right.
One structural point explains the pace. Resting buy interest below the market thins as price falls through it, so the same order size moves price further — which is a mechanical reason for the speed rather than a psychological one.
One practical consequence of the speed asymmetry deserves stating on its own: time stops behave differently here. A long position that goes nowhere for twenty bars is usually dead money. A short that goes nowhere for twenty bars is often sitting in the compression that precedes the next fall, because falling markets spend more of their time coiled and less of it travelling.
That does not make patience free, and it does change what the waiting means. The check worth running is whether the swing highs are still lower — if they are, the position is intact and slow; if one has printed higher, the sequence is broken regardless of how the position looks. Let the structure decide the exit, not the clock, and the difference between a stalled trade and a working one stays visible.
What a downtrend is not
It is not a falling line. The sequence is the definition, not the slope.
It is not permanent. Runs end at two more often than not.
It is not free money to short. The rallies inside are the risk.
And it is not timeframe-free. It is only a downtrend on a stated chart.
When it fails
A range read from its upper boundary looks exactly like a downtrend starting. Lower highs appear, the lows hold, and a short taken on the appearance gets covered at the bottom of the box.
The second failure is shorting after the third lower low. Most runs are over by then, and the position is being opened into the part of the sequence where a bounce is most likely.
A third is sizing a short like a long. The bounces are faster than the falls, so the same stop distance is hit more often.
A fourth is ignoring the higher-timeframe reading. A daily uptrend containing an hourly downtrend is a pullback, and pullbacks end.
And a fifth is calling the bottom on price alone. A downtrend ends when the sequence changes, which requires a higher low — an event you can wait for rather than predict.
The original data
On this site’s shared 576-bar history, 42 swing lows were identified at a one per cent threshold. The
longest unbroken run of lower lows was 4, the same as the longest run of higher highs, and the mean run of
higher highs was 2.05 with 67% ending at two or fewer. The figures are in
research/series-measurements.json, produced by site/measure_series.py.
The identical run lengths in both directions are the finding worth carrying. Whatever asymmetry exists between rising and falling markets, it does not show up as longer sequences — it shows up in how fast each leg travels and how violently it reverses. So size a short position for the speed rather than the direction, and take the sequence count as a signal about when to stop pressing rather than as evidence about which way the market is going next.
Related
Market structure is the framework the sequence belongs to. Trend following is the method that trades it. And short selling is the mechanics of taking the position.
Downtrends taught me more about position size than anything else. The rallies inside them are violent enough that a short sized for a calm market gets taken out on a move that ultimately went nowhere. I size shorts smaller than longs for that reason alone, and I have never regretted it.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.