Technical Analysis · Beginner · 5 min
Highs and lows: what a trend is
You can mark swing highs and lows on a chart and classify a trend as up, down or sideways from their sequence.
What is a trend?
"The trend is your friend" is one of the oldest sayings on Wall Street. Everyone uses the word, in news, in forums, in trading courses.
Ask what exactly a trend is, and the answers get vague. It goes up. It looks strong. There is a precise definition, and it is simpler than most people expect. It only needs the highs and lows of the chart.
Higher highs, higher lows
Prices do not move in straight lines. Even in a strong rise, they move forward, pull back, and move forward again. Each of these back-and-forth movements leaves turning points.
- A swing high is a peak: a high with lower highs on both sides.
- A swing low is a trough: a low with higher lows on both sides.
Many traders require two or three lower highs, or higher lows, on each side before they call a point a swing. That filters out tiny wiggles.
The sequence of swings defines the trend:
- An uptrend makes higher highs and higher lows. Each rally reaches further than the last, and each pullback stops above the previous low.
- A downtrend makes lower highs and lower lows.
- When highs and lows are roughly level, there is no trend: the market is moving sideways in a range.
The chart shows a fictional uptrend. The swing highs rise from 104.34 to 107.10 to 110.25. The swing lows rise from 101.77 to 104.64 to 108.11. Every new high is higher, and every new low is higher.
This definition goes back to Dow Theory from the early 20th century, which described trends by their successive peaks and troughs. It is useful because it is objective: two people who mark the same swings will see the same trend. It describes the trend so far. It does not say how long it will last.
Each low higher
In the fictional chart, the most important points for an uptrend are the lows.
- After the first swing high at 104.34, the price pulls back to 101.77 on candle 10. That is the first higher low, well above the start at about 99.55.
- After the next high at 107.10, the pullback ends at 104.64 on candle 18, above 101.77.
- After the high at 110.25, the pullback ends at 108.11 on candle 25, above 104.64.
As long as each pullback holds above the previous swing low, the structure of the uptrend is intact. If a pullback fell below 108.11, the sequence would be broken, which is a first warning that the trend may be changing. The lesson on trend changes looks at that in detail.
Common mistakes
- Calling every wiggle a swing. Decide how large a swing must be on your timeframe.
- Judging the trend by the last few candles. The swings define the trend, not the latest color.
- Mixing timeframes. A downtrend on the hourly chart can sit inside an uptrend on the daily chart.
- Assuming a trend will continue. The definition describes the past structure, not the future.
The takeaway
An uptrend makes higher highs and higher lows, a downtrend lower highs and lower lows. Mark the swings and the trend becomes visible.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the second higher low.
Tap the chart.
Candle 18 marks a swing low at 104.64, above the earlier swing low at 101.77 on candle 10.
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2What defines an uptrend?
Each rally reaches further than the last, and each pullback stops above the last low.
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3What is a swing low?
A swing low is a turning point where a pullback ends. Many traders require a few higher lows on each side.
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4Highs and lows are roughly equal over many swings. What is that called?
Without higher or lower swings, there is no trend in either direction. The next lesson but one covers ranges.
of 4 correct.