Trends and Trendlines

Climbing a staircase, every step takes you a little higher, and now and then there is a landing where you pause before the next flight. You only know you have started going down when you step below the last landing. Market trends work the same way: a series of steps with pauses in between, and the trend is intact until price breaks below its last resting point.

The three states of a market

At any time, a market is doing one of three things:

• Uptrend: price is generally climbing.
• Downtrend: price is generally falling.
• Range (sideways): price is bouncing between support and resistance without a clear direction.

Markets spend a lot of their time in ranges. Learning to tell which state you are in is one of the most useful skills in charting, because each state calls for a different approach.

Higher highs and higher lows

Prices never move in a straight line. They zigzag. Each peak in the zigzag is a swing high, and each dip is a swing low.

• An uptrend makes higher highs (HH) and higher lows (HL). Each peak is above the last peak, and each dip stops above the last dip.
• A downtrend makes lower highs (LH) and lower lows (LL). Each rally fails below the last one, and each drop goes deeper.

                       /
                 HH   /
                 /\  /
           HH   /  \/
           /\  /   HL
     HH   /  \/
     /\  /   HL
    /  \/
   /   HL
  /