Trend: a staircase of highs
Lesson 4 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.
The staircase up
Price never moves in a straight line. In an uptrend each new high is above the last one, an HH (higher high), and each pullback ends above the last, an HL (higher low). Charles Dow described trends this way over a century ago. A downtrend is the mirror: lower highs (LH) and lower lows (LL).
When the staircase breaks
Per Dow, a trend holds until there’s a clear reversal signal. The first warning is a failed new high, an LH. The break itself is a candle closing below the last HL. Closing, that is: a wick below the level isn’t a break yet, it’s a test. Beginners mix the two up and get shaken out by noise.
The range
Sometimes there’s no staircase: highs and lows sit at the same level. That’s a range, or a flat. The market spends a lot of time in ranges, building up for the next move. In a range you buy near the bottom edge and sell near the top, and in the middle you simply wait.
How to use it
The trend answers the main question: which way to look for trades at all. You can trade against it, but it’s harder and riskier. The last HL is your guide for the stop. Now in the trainer you’ll find the last HL and the candle that broke the trend yourself.
Check yourself
- Highs: 50, 55, 61. Lows: 47, 52, 57. What trend is this?
Correct answer: Up: HH and HL. Both highs and lows are rising: each HH above the last, each HL above the last. It’s an uptrend. - The last HL is 118. A candle wicked down to 117 but closed at 119. Is the trend broken?
Correct answer: No: a break counts by the close, and the close is above 118. The wick shows price was tested lower and bought back. A break is a close beyond the level. - Where is the logical stop for a buy in an uptrend?
Correct answer: Just below the last HL. While price is above the last HL, the staircase stands. If it breaks, the buy idea no longer works, and the stop closes the trade.