Chart school · lesson 5 of 10

Trend: higher highs, lower lows, ranges, trendlines and channels

Before any pattern, ask one question: which way has the price been going? A trend has a plain definition, and it takes thirty seconds to check.

The 5 drawings Check yourself

The idea

A price never moves in a straight line. It moves in swings: up, part of the way back, up again. The turning points are called swing highs and swing lows, and their order defines the trend.

A trend is a description of what has happened so far. It does not promise to continue. But a pattern read against the trend is a different thing from the same pattern read with it, which is why trend comes before the patterns of the next lessons.

5.1

Uptrend

What it shows: Each swing high is above the last swing high, and each swing low is above the last swing low. The price gives back part of each rise, never all of it.
How traders use it: Buyers have been willing to pay more each time, and to buy again sooner on each dip. Traders following the trend look at the dips, not the peaks.
A common mistake: Calling the top. An uptrend is intact until a swing low is broken; a single falling candle, or a pattern with a falling name, does not end it.

Trend, in the glossary

5.2

Downtrend

What it shows: Each swing low is below the last swing low, and each swing high is below the last swing high. The bounces recover part of each fall, never all of it.
How traders use it: Sellers have accepted lower prices each time, and have sold again sooner on each bounce. Traders following the trend look at the bounces.
A common mistake: Buying because the price looks cheap. In a downtrend, a lower price than yesterday is normal. The trend is intact until a swing high is broken.

Bear market, in the glossary

5.3

Range

What it shows: The highs stop at about the same price and the lows stop at about the same price. There are no higher highs and no lower lows: the price moves sideways between two levels.
How traders use it: Buyers and sellers agree, roughly, on what the price should be. Markets spend a great deal of time like this. Traders watch the two edges and treat the middle as noise.
A common mistake: Applying trend thinking to a range. Rules that follow a trend lose repeatedly when the price is going sideways, and it is easy to mistake the start of a range for a pause.

A sideways market, in the Playbook

5.4

Trendline

What it shows: A straight line ruled through the swing lows of an uptrend, or the swing highs of a downtrend. Two points are enough to draw it. A third touch is what makes other people notice it.
How traders use it: The line shows the pace of the trend. Traders watch how the price behaves when it returns to the line, and treat a clear close beyond it as a change of pace.
A common mistake: Redrawing the line every time the price crosses it. A trendline is drawn by hand and two people will draw it differently. A break of the line is a change of pace, not necessarily a reversal.

Trend lines, in Chart school

5.5

Channel

What it shows: A trendline with a second line parallel to it on the other side of the price. In an uptrend the trendline runs under the lows and the channel line runs over the highs.
How traders use it: The channel frames the swings. Traders note where in the channel the price is: near the trendline, near the channel line, or in the middle.
A common mistake: Expecting the price to respect the lines exactly. Prices overshoot and undershoot channels all the time, and a channel is only clear once most of it has been drawn.

A calculated channel: Donchian

SimulationEvery drawing is invented to show a shape as plainly as possible. None of them is a market, and a real chart is rarely this tidy. Educational information, not investment advice or a recommendation to trade.

To carry away

Lesson 5, in four lines.

01
Uptrend: higher highs and higher lows. Downtrend: lower highs and lower lows.
02
A range has neither. Markets spend much of their time in ranges.
03
A trendline is ruled by hand through swing points. It shows pace, and it is a matter of judgement.
04
A trend describes the past. It is intact until a swing point breaks, and it can break at any time.

Check yourself

Three questions on this lesson.

Choose an answer and press Check. You can try each as often as you like. No answer is stored, nothing is sent anywhere and no score is kept.

Question 1 of 3
What defines an uptrend?
Three rising candles in a rowHigher swing highs and higher swing lowsA price above a round number
Question 2 of 3
How many points are needed to draw a trendline?
Two, though a third touch makes it more widely noticedExactly fiveOne
Question 3 of 3
The price closes below a rising trendline. What has certainly happened?
The trend has reversedA downtrend has begunThe pace of the rise has changed

An explanation for study. It is not advice, a recommendation or a forecast. No pattern is reliable on its own, and a shape described here says nothing certain about what a price will do next.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

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The idea of this lesson

Lesson 5, in four lines.

Three questions on this lesson.

The idea of this lesson

Lesson 5, in four lines.

Three questions on this lesson.