Trends

Which way is the market going?

A trend is the general direction price is moving. There are only three choices:

• Up (an uptrend)
• Down (a downtrend)
• Sideways (no trend, which gets its own lesson)

Price never moves in a straight line. It zigzags: up a bit, down a bit, up a bit more. So how do you tell the direction? You look at the turning points.

Peaks and dips

Every zigzag has peaks and dips.

• A peak, where price stopped climbing and turned down, is a swing high.
• A dip, where price stopped falling and turned up, is a swing low.

Now compare each peak with the one before it, and each dip with the one before it.

Stairs going up

In an uptrend, price makes:

• Higher highs (HH): each peak is higher than the last.
• Higher lows (HL): each dip stops higher than the last.

It looks like stairs going up. Say a made-up stock, Pizza Palace, goes like this: up to $26, dips to $23, up to $30, dips to $27, up to $35. Each peak ($26, $30, $35) is higher. Each dip ($23, $27) is higher. That's an uptrend.

Stairs going down

A downtrend is the mirror image:

• Lower highs (LH): each peak is lower than the last.
• Lower lows (LL): each dip goes lower than the last.

Buyers try to push price up, but each push gets weaker. Sellers keep winning.

When does a trend end?

Watch the stairs. In an uptrend, the first warning is when price falls below the last higher low. The staircase just lost a step. That doesn't mean a downtrend has started, but the uptrend is in trouble.

In a downtrend, the first warning is when price climbs above the last lower high.

How traders use trends

There's an old saying: "The trend is your friend." It means many traders prefer to go with the direction of the trend instead of fighting it. In an uptrend, they pay more attention to buying ideas. In a downtrend, they're careful about buying at all.

Remember timeframes from the last level? A chart can be in an uptrend on the daily chart and a downtrend on the 5-minute chart at the same time. That's why traders check the bigger timeframe first.

What goes wrong

• Seeing a trend that isn't there. Two candles going up is not a trend. You need a few peaks and dips to compare.
• Getting in late. After a long run of stairs, the trend is older and may be getting tired.
• Trends end. Every trend stops someday. Nobody rings a bell when it happens.

Remember

• Uptrend: higher highs and higher lows. Downtrend: lower highs and lower lows.
• Compare peaks with peaks and dips with dips.
• A break of the last higher low (or lower high) is the first warning.
• Check the bigger timeframe first.