The definition
An uptrend is a sequence in which each significant low is above the one before it, and each significant high clears the one before it. A downtrend is the same sentence with the words reversed. That is the whole definition.
It sounds almost too simple to be worth stating. It is worth stating because it is falsifiable. You can look at a chart and say, with no opinion involved, whether the condition holds. Most of what people call trend analysis cannot be checked that way, which is why two people can look at the same chart and argue indefinitely.
A trend is a description of the past that happens to be useful. The moment you treat it as a description of the future, it stops being either.
Where a trend ends
This is the half that gets skipped, and it is the half that costs money. If an uptrend is higher lows and higher highs, then it ends when price makes a lower low. Not when it falls. Not when it feels weak. When a low is taken out.
The confirmation usually arrives one step later: the bounce that follows fails to clear the previous high, giving you a lower high as well. At that point the sequence has reversed on both counts.
Knowing this in advance is what makes it usable. Before the trend breaks, you can mark the exact price that would end it — and that price is a fact on the chart, not a feeling. It is also, not coincidentally, the most defensible place most people will ever put a stop.
The third state nobody teaches
Charts are taught as though there are two states, up and down. There are three, and the third is where price spends most of its life: neither. Lows that are not clearly higher, highs that are not clearly lower, a sequence that refuses to resolve.
The honest reading of that chart is "no trend". Most losses in trend-following come from insisting on an answer when the chart is refusing to give one. Being able to say "this is sideways, I have no read" is a skill, and it is the one that separates people who last from people who do not.
Redrawing the trend after every candle so that it always agrees with the most recent move. If your definition of the trend changes each time price wobbles, you do not have a definition — you have a mood. Mark the low that matters, write the price down, and let it be wrong if it is wrong.
Read it yourself
One chart. Decide what state it is in before you reveal anything.
- Where does the downtrend stop and something else begin?
- Identify the two higher lows that establish the new sequence.
- Which single price, if broken, would end the uptrend you have just identified?
Show answers
1. Around the eighth candle. Up to there each low is lower; after it, lows stop falling and start rising.
2. The pullback lows near candles 11 and 14. Each sits above the one before, which is the condition being met.
3. The most recent higher low, around 104.8. A close below it and the sequence has broken — which is exactly why that number, not a round figure or a percentage, is the one worth writing down.
Terms used
- Higher low
- A pullback that stops above the previous pullback. The building block of an uptrend.
- Lower high
- A rally that fails to reach the previous high. The first hint an uptrend is finished.
- Swing point
- A high or low with lower highs or higher lows on both sides of it — the pivots the sequence is built from.
- Sideways
- Neither sequence holding. A legitimate reading, not a failure to find one.